Can Dynamic Goods Explain Asset Returns?
نویسنده
چکیده
Recent evidence indicates the new goods bias in the Consumer Price Index is large and cyclical (Broda and Weinstein, 2010). Because standard theory prices assets by the discounted value of real payoffs, these findings have implications for asset pricing. In this paper, I use the growth of dynamic goods—goods subject to more innovation—as a proxy for the growth of new goods, and include this as an additional risk factor in the CCAPM. Because of the greater volatility and procyclical nature of dynamic goods, the empirical performance of the model improves along several dimensions: It can explain most of the cross-sectional variation in returns across the 25 Fama-French portfolios, and predicts a time-varying equity premium of around two percent. ∗Email: [email protected]
منابع مشابه
Jump-Diffusion International Asset Pricing with Nontraded Consumption Goods
We present a jump-diffusion international asset pricing model with stochastic exchange rates and inflation rates when investors consume both traded and nontraded goods. We argue that in general, the Adler-Duma inflation rate differential may not capture PPP deviation risks, unless all volatilities, drift rates and jumps rates for price levels, exchange rates and asset returns are constant, and ...
متن کاملInternational Asset Pricing with Nontradable Consumption Goods
We extend and unify existing international asset pricing models for perfect capital markets by allowing both exchange rates and inflation rates to be stochastic and investors to consume both tradable and nontradable goods. We show that country-specific demand for risky assets arises from two sources: PPP-deviationrate differential risks and nontradable-good-specific inflation-rate-differential ...
متن کاملConditional Risk Premia in Currency Markets and Other Asset Classes
The downside risk CAPM (DR-CAPM) can price the cross section of currency returns. The market-beta differential between high and low interest rate currencies is higher conditional on bad market returns, when the market price of risk is also high, than it is conditional on good market returns. Correctly accounting for this variation is crucial for the empirical performance of the model. The DR-CA...
متن کاملLucky Factors
We propose a new method to select amongst a large group of candidate factors — many of which might arise as a result of data mining — that purport to explain the cross-section of expected returns. The method is robust to general distributional characteristics of both factor and asset returns. We allow for the possibility of time-series as well as cross-sectional dependence. The technique accomm...
متن کاملWhy Are Asset Returns More Volatile during Recessions? A Theoretical Explanation
During recession, many macroeconomic variables display higher levels of volatility. We show how introducing an AR(1)-ARCH(1) driving process into the canonical Lucas consumption CAPM framework can account for the empirically observed greater volatilty of asset returns during recessions. In particular, agents' joint forecasting of levels and time-varying second moments transforms symmetric-volat...
متن کامل