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| Type | Conference Presentation |
| Scope | Discipline-based scholarship |
| Title | Asset Prices and the Return to Normalcy |
| Organization Unit | |
| Authors |
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| Presentation Type | paper |
| Item Subtype | Original Work |
| Refereed | No |
| Status | Published electronically before print/final form (Epub ahead of print) |
| Language |
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| Event Title | Workshop on Computational Economics and Finance |
| Event Type | workshop |
| Event Location | Hoover Institution, Stanford |
| Event Start Date | July 15 - 2013 |
| Event End Date | August 5 - 2013 |
| Abstract Text | Most standard asset-pricing models in the finance literature assume that consumption growth is stationary, that is, the consumption process has a unit root. In contrast to this literature, we study the implications of aggregate consumption processes featuring short-run deviations from a long-run trend. We find that the implications of our model are dramatically different from those obtained in the existing literature. A representative-agent model with standard CRRA preferences can reproduce the equity premium, the volatility of stock prices, and the average risk-free rate with a coefficient of relative risk aversion below ten. This finding suggests that temporary deviations from trend can play an important role in explaining asset pricing puzzles. |
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