Recent macro-finance contributions explain a great deal of unconditional asset pricing by introducing persistent consumption risks and rare disasters. Only the volatility puzzles remain unresolved among the longer-established issues in this literature. Motivated by empirical finance contributions and conventional wisdom, we abstract from a consumption-centric analysis and let the asset-pricing kernel depend on habit formation and consumer confidence as a demand shifter correlated with consumption growth. The resulting model compares favorably with the literature in explaining the risk-free rate volatility, but it falls short in matching the standard deviation of the market return. Our Öndings justify using supplementary information to price assets while warning against neglecting a thorough analysis of consumption growth dynamics.

By Force of Confidence

Vincenzo Merella;
2020

Abstract

Recent macro-finance contributions explain a great deal of unconditional asset pricing by introducing persistent consumption risks and rare disasters. Only the volatility puzzles remain unresolved among the longer-established issues in this literature. Motivated by empirical finance contributions and conventional wisdom, we abstract from a consumption-centric analysis and let the asset-pricing kernel depend on habit formation and consumer confidence as a demand shifter correlated with consumption growth. The resulting model compares favorably with the literature in explaining the risk-free rate volatility, but it falls short in matching the standard deviation of the market return. Our Öndings justify using supplementary information to price assets while warning against neglecting a thorough analysis of consumption growth dynamics.
Asset Pricing, Consumer Confidence, Habit Persistence, Recursive Utility, Utility from Anticipation, Year-on-Year Growth
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11584/341872
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