Asset Return Dynamics under Habits and Bad Environment–Good Environment Fundamentals
2017; University of Chicago Press; Volume: 125; Issue: 3 Linguagem: Inglês
10.1086/691450
ISSN1537-534X
Autores Tópico(s)Stochastic processes and financial applications
ResumoWe introduce a “bad environment–good environment” (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk-free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices and their comovements with the macroeconomic outlook. In particular, when option-implied volatility is high—as measured, for instance, by the VIX index—the distribution of consumption growth is more negatively skewed.
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