A Markov-switching model of postwar quarterly real GNP growth is used to examine the duration dependence of business cycles. It extends the Hamilton model and the duration-dependent model of Durland and McCurdy, and compares quite favorably to simpler models in out-of-sample forecasting. When an...

This paper investigates the relationship between portfolio choice and labor income risk in the National Longitudinal Survey of Youth 1979 Cohort. Permanent income risk (variability of shocks to income that have permanent effect) significantly reduces the share of risky assets in the household's...

A recent article by Ben Bernanke (1984) tests the rational expectations-permanent income hypothesis using panel data on automobile expenditures. He finds no evidence refuting the hypothesis. This paper incorporates a threshold adjustment process into Bernanke's model. Estimations based on a...

We study a Lucas asset-pricing model that is standard in all respects, except that the representative agent's subjective beliefs about endowment growth are distorted. Using constant relative risk-aversion (CRRA) utility, with a CRRA coefficient below 10; fluctuating beliefs that exhibit, on...

This paper demonstrates that negative serial correlation in long-horizon stock returns is consistent with an equilibrium model of asset pricing. When investors display only a moderate desire to smooth their consumption, commonly used measures of mean reversion in stock prices calculated from...