Citation

Discussion Paper Details

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Title: Asset Return Dynamics Under Bad Environment-Good Environment Fundamentals

Author(s): Geert Bekaert and Eric Engstrom

Publication Date: December 2010

Keyword(s): countercyclical risk aversion, dividend yield, economic uncertainty, equity premium, return predictability and variance premium

Programme Area(s): Financial Economics

Abstract: We introduce a "bad environment-good environment" technology for consumption growth in a consumption-based asset pricing model. Using the preference structure from Campbell and Cochrane (1999), the model generates realistic time-varying volatility, skewness and kurtosis in fundamentals while still permitting closed-form solutions for asset prices. The model not only fits standard salient asset prices features including means and volatilities for equity returns and risk free rates, but also generates a realistic variance premium and option prices.

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Bibliographic Reference

Bekaert, G and Engstrom, E. 2010. 'Asset Return Dynamics Under Bad Environment-Good Environment Fundamentals'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8150