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Asset prices with temporary shocks to consumption


Pohl, Walter; Wilms, Ole; Schmedders, Karl (2014). Asset prices with temporary shocks to consumption. Swiss Finance Institute Research Paper 14-41, University of Zurich.

Abstract

Most standard asset-pricing models assume that all shocks to consumption are permanent. We relax this assumption and allow also for temporary shocks. The implications of our model are dramatically different from those obtained in the prior literature. A canonical and parsimonious asset pricing model with CRRA preferences and temporary shocks can reproduce the equity premium, high return volatility and return predictability with a coefficient of relative risk aversion below ten. This finding suggests that temporary shocks can play an important role in explaining asset pricing puzzles

Abstract

Most standard asset-pricing models assume that all shocks to consumption are permanent. We relax this assumption and allow also for temporary shocks. The implications of our model are dramatically different from those obtained in the prior literature. A canonical and parsimonious asset pricing model with CRRA preferences and temporary shocks can reproduce the equity premium, high return volatility and return predictability with a coefficient of relative risk aversion below ten. This finding suggests that temporary shocks can play an important role in explaining asset pricing puzzles

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2014
Deposited On:16 Oct 2014 12:19
Last Modified:06 Sep 2017 15:37
Series Name:Swiss Finance Institute Research Paper
Number of Pages:47
Free access at:Official URL. An embargo period may apply.
Official URL:http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2450090
Other Identification Number:merlin-id:10264

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