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Consumption-Based Asset Pricing

116 Pages Posted: 29 Oct 2002  

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: September 2002

Abstract

This chapter reviews the behavior of financial asset prices in relation to consumption. The chapter lists some important stylized facts that characterize US data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The chapter argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, time-varying, and correlated with the state of the economy. Models that have this feature, including models with habit-formation in utility heterogeneous investors, and irrational expectations, are discussed. The main focus is on stock returns and short-term real interest rates, but bond returns are also considered.

Suggested Citation

Campbell, John Y., Consumption-Based Asset Pricing (September 2002). Harvard Institute Research Working Paper No. 1974. Available at SSRN: https://ssrn.com/abstract=343784 or http://dx.doi.org/10.2139/ssrn.343784

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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