Asset Return Dynamics under Bad Environment-Good Environment Fundamentals

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 non-Gaussian features of 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 realistic features of the "risk-neutral" conditional densitiy of equity returns, including the variance premium

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Year of publication:	2011
Authors:	Bekaert, Geert
Other Persons:	Engstrom, Eric (contributor)
Publisher:	[2011]: [S.l.] : SSRN
Subject:	Theorie \| Theory \| Kapitaleinkommen \| Capital income \| CAPM \| Volatilität \| Volatility \| Finanzmarkt \| Financial market \| Risikopräferenz \| Risk attitude \| Privater Konsum \| Private consumption

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