Asset Pricing with Countercyclical Household Consumption Risk

80 Pages Posted: 14 May 2014

See all articles by George M. Constantinides

George M. Constantinides

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Anisha Ghosh

Carnegie Mellon University

Multiple version iconThere are 2 versions of this paper

Date Written: May 2014

Abstract

We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross-section of excess returns.

Suggested Citation

Constantinides, George M. and Ghosh, Anisha, Asset Pricing with Countercyclical Household Consumption Risk (May 2014). NBER Working Paper No. w20110, Available at SSRN: https://ssrn.com/abstract=2436718

George M. Constantinides (Contact Author)

University of Chicago - Booth School of Business ( email )

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Anisha Ghosh

Carnegie Mellon University ( email )

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Pittsburgh, PA 15213-3890
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