Advanced Monetary Economics Notes on: Asset returns, risk and consumption choices: a macroeconomic perspective

1 Stylized facts and puzzles Recent empirical research has highlighted a number of regularities, mainly for US data in the post-World-War-II period (but also con…rmed over longer samples and extended to other countries by crosscountries studies). The main relevant stylized facts are the following: 1. " high " real average return on stocks (US S&P index: around 8% annually over 1947-2000) 2. " low " real average return on " riskless " bonds ! riskfree real rate (US T-bills: around 1% annually over 1947-2000) 3. high volatility of real stock returns (annualized standard deviation: around 16%) 4. low volatility of real riskless rate (annualized standard deviation of ex-post rate: around 2%) 5. positive and very smooth real consumption growth (for non-durables & services: 2% annual growth rate with 1.1% standard deviation) 6. relatively low correlation between consumption growth and real stock returns (0.23 at quarterly horizon) This set of facts has several implications for the interpretation of the joint behavior of asset returns and consumption. Mainly: