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Empirical Asset Pricing , Fall 2019 Class 2 : Consumption-Based Asset-Pricing Models
| Content Provider | Semantic Scholar |
|---|---|
| Copyright Year | 1969 |
| Abstract | The empirical asset-pricing literature focuses on the estimation and evaluation of assetpricing models. For most empiricists, the consumption-based asset-pricing models has an enormous appeal, as it establishes a direct link between the aggregate stock market returns and the fundamentals of the economy. In an endowment economy, the risk-averse representative agent makes optimal consumption and investment decisions, and his optimization in equilibrium gives rise to a powerful pricing relation that links security returns to risk-aversion and consumption growth. With data on consumption and stock returns ready, this famous first-order condition was first tested in the classic paper of Hansen and Singleton (1982), which is the starting point of our today’s class. Written more as a methodological piece to introduce the generalized method of moments estimators (GMM) of Hansen (1982), this paper has all the necessary ingredients to show us the equity-premium puzzle. But it is not until Mehra and Prescott (1985) that the poor performance of the consumption-based models starts to take center stage in the asset-pricing literature. Over the span of two decades since the publication of Mehra and Prescott in 1985, solving the equity premium puzzle has been one of the most active literature in asset pricing. Among others, the two most notable developments have been the habit model of Campbell and Cochrane (1999) and the long-run risk model of Bansal and Yaron (2004). Over the past ten years, this literature has not been as active, but learning about this literature and understanding the key issues should be an integral part of your PhD training. For this reason, your first mandatory assignment is to reproduce the result of Hansen and Singleton (1982). |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://en.saif.sjtu.edu.cn/junpan/slide_EAP/Notes_EAP_Structure.pdf |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |
