Consumption The Persistence Of Shocks And Asset Price Volatility

Download or read book Consumption, the Persistence of Shocks, and Asset Price Volatility written by Juan Carlos Rodriguez and published by . This book was released on 2007 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In a general equilibrium setting, a temporary component in consumption introduces a wedge between the volatility of equity returns and the volatility of consumption growth. This paper explores the asset pricing consequences of this property in a model in which consumption is the sum of a permanent and a transitory component. Permanent shocks are assumed to be rare events, while transitory shocks follow a diffusion process. When calibrated to US annual data, the model matches first and second moments of equity and bond returns for preference parameters within acceptable bounds. Permanent and transitory shocks together explain the equity premium, while transitory shocks alone explain the excess volatility of returns.