How Can Consumption Based Asset Pricing Models Explain Low Interest Rates
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Author | : Felipe F. Schwartzman |
Publisher | : |
Total Pages | : 32 |
Release | : 2015 |
Genre | : |
ISBN | : |
The real interest rate is at historically low levels following the Great Recession. This article examines under which conditions the leading consumption-based asset-pricing models can give rise to such a reduction. In particular, we examine implications of standard constant relative risk aversion preference models with Gaussian shocks, models with consumption disaster, models with long-run risk, and models with habit formation. Given the models reviewed, the high-risk premium suggests that low interest rates in the recent period are likely to be either a consequence of a perception that consumption risk is particularly high, or of very low risk tolerance.
Author | : John H. Cochrane |
Publisher | : Princeton University Press |
Total Pages | : 560 |
Release | : 2009-04-11 |
Genre | : Business & Economics |
ISBN | : 1400829135 |
Winner of the prestigious Paul A. Samuelson Award for scholarly writing on lifelong financial security, John Cochrane's Asset Pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Cochrane traces the pricing of all assets back to a single idea--price equals expected discounted payoff--that captures the macro-economic risks underlying each security's value. By using a single, stochastic discount factor rather than a separate set of tricks for each asset class, Cochrane builds a unified account of modern asset pricing. He presents applications to stocks, bonds, and options. Each model--consumption based, CAPM, multifactor, term structure, and option pricing--is derived as a different specification of the discounted factor. The discount factor framework also leads to a state-space geometry for mean-variance frontiers and asset pricing models. It puts payoffs in different states of nature on the axes rather than mean and variance of return, leading to a new and conveniently linear geometrical representation of asset pricing ideas. Cochrane approaches empirical work with the Generalized Method of Moments, which studies sample average prices and discounted payoffs to determine whether price does equal expected discounted payoff. He translates between the discount factor, GMM, and state-space language and the beta, mean-variance, and regression language common in empirical work and earlier theory. The book also includes a review of recent empirical work on return predictability, value and other puzzles in the cross section, and equity premium puzzles and their resolution. Written to be a summary for academics and professionals as well as a textbook, this book condenses and advances recent scholarship in financial economics.
Author | : John Y. Campbell |
Publisher | : |
Total Pages | : 17 |
Release | : 1999 |
Genre | : Assets (Accounting) |
ISBN | : |
The poor performance of consumption-based asset pricing models relative to traditional portfolio-based asset pricing models is one of the great disappointments of the empirical asset pricing literature. We show that the external habit-formation model economy of Campbell and Cochrane (1999) can explain this puzzle. Though artificial data from that economy conform to a consumption-based model by construction, the CAPM and its extensions are much better approximate models than is the standard power utility specification of the consumption-based model. Conditioning information is the central reason for this result. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumption-based model and the CAPM are equivalent and perfect conditional asset pricing models. However, the model economy also produces time-varying expected returns, tracked by the dividend-price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture, and so portfolio-based models are better approximate unconditional asset pricing models
Author | : John Y. Campbell |
Publisher | : |
Total Pages | : |
Release | : 2002 |
Genre | : |
ISBN | : |
Author | : John H. Cochrane |
Publisher | : Now Publishers Inc |
Total Pages | : 117 |
Release | : 2005 |
Genre | : Business & Economics |
ISBN | : 1933019158 |
Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Author | : Nathan Born |
Publisher | : |
Total Pages | : |
Release | : 2015 |
Genre | : |
ISBN | : |
This paper seeks to create a representative model of the yield curve by combining the standard consumption based asset pricing model used by Canzoneri, et al and the equation for the Pure Expectations Hypothesis of the Term Structure of Interest Rates. I begin with reviewing different theories of the yield curve. I then use consumption based asset pricing model in conjunction with the expectations hypothesis to see whether the models can accurately represent the data on yield curve slopes. I conclude with an examination of the forward looking aspects of the yield curve. I find that the forward-looking nature of the yield curve which is implied by the Expectations Hypothesis is not entirely reliable in predicting real GDP.
Author | : Selcuk Caner |
Publisher | : |
Total Pages | : 174 |
Release | : 1994 |
Genre | : |
ISBN | : |
Author | : Dirk Krueger |
Publisher | : |
Total Pages | : 28 |
Release | : 2007 |
Genre | : Assets (Accounting) |
ISBN | : |
We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
Author | : Thomas F. Cooley |
Publisher | : Princeton University Press |
Total Pages | : 452 |
Release | : 1995-02-26 |
Genre | : Business & Economics |
ISBN | : 9780691043234 |
This introduction to modern business cycle theory uses a neoclassical growth framework to study the economic fluctuations associated with the business cycle. Presenting advances in dynamic economic theory and computational methods, it applies concepts to t
Author | : Stuart Hyde |
Publisher | : |
Total Pages | : |
Release | : 2020 |
Genre | : |
ISBN | : |
We investigate the relationship between consumption and the term structure using UK interest rate data. We demonstrate that the term structure contains information about future economic activity since the yield spread has forecasting power for future consumption growth. Further we analyze the ability of the consumption based capital asset pricing model (C-CAPM) using traditional power utility, two habit formation specifications proposed by Abel (1990) and Campbell and Cochrane (1999) and novelly, the housing C-CAPM proposed by Piazzesi et al. (2007) to characterize the term structure of interest rates. Our findings are supportive of the habit formation specification of Campbell and Cochrane (1999), other models fail to yield economically plausible parameter values.