Stock and bond joint pricing, consumption surplus, and inflation news
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AbstractIn this paper, Bekaert et al.’s (2010) model is modified by allowing consumption growth to depend on dividend yield rather than dividend growth. With a simplified inflation dynamic, the general equilibrium model is characterized by a system of linear and affine stochastic equations. From these equations, a closed-form solution jointly pricing equity and bonds is derived. The generalized method of moments is used to demonstrate that our model’s calibrated moments broadly match the first and second moments of stocks, bonds, and other macroeconomic variables in the US. Our estimated equity premium is 6.0 %, which closely matches its actual value of 5.6 %. The predicted risk aversion is countercyclical. Moreover, an out-of-sample test indicates the significant improvement of predictive power on the price–dividend ratio over Campbell and Cochrane’s (1999) model. Our model can further capture the dramatic increase in the price–dividend ratio after the 1990s.
Acceptance Date01/05/2021
All Author(s) ListJun Lou, Tat Wing Wong, Ka Wai Terence Fung, Jonas J. Nazimoff Shaende
Journal nameResearch in International Business and Finance
Year2021
Month12
Volume Number58
PublisherElsevier B.V.
Place of PublicationNetherlands
Article number101426
ISSN0275-5319
LanguagesEnglish-United States
KeywordsAsset pricing, Habitual persistence, Price–dividend ratio, Inflation news

Last updated on 2021-01-12 at 00:02