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Asset pricing

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Asset Pricing
The authors model consumption and dividend growth rates as containing both a small long-run
predictable component and fluctuating economic uncertainty (consumption volatility). These dynamics,
for which they provide empirical support, in conjunction with generalized recursive preferences, can
explain key asset markets phenomena. The model can justify the equity premium, the risk-free rate, and
the volatility of the market return, risk-free rate, and the price-dividend ratio. As in the data, dividend
yields predict returns and the volatility of returns is time-varying.
Dynamic Portfolio Choice
The authors present a novel approach to dynamic portfolio selection that is as easy to implement as the
static Markowitz paradigm. They expand the set of assets to include mechanically managed portfolios
and optimize statically in this extended asset space. They consider “conditional” portfolios, which invest
in each asset an amount proportional to conditioning variables, and “timing” portfolios, which invest in
each asset for a single period and in the risk-free asset for all other periods. The static choice of these
managed portfolios represents a dynamic strategy that closely approximates the optimal dynamic
strategy for horizons up to five years.
Term Structure of Interest Rates
The authors develop a term structure model where the short interest rate and the market price of risks
are subject to discrete regime shifts. Empirical evidence from Efficient Method of Moments estimation
provides considerable support for the regime shifts model. Standard models, which include affine
specifications with up to three factors, are sharply rejected in the data. Their diagnostics show that only
the regime shifts model can account for the well-documented violations of the expectations hypothesis,
the observed conditional volatility, and the conditional correlation across yields. They find that regimes
are intimately related to business cycles.

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Asset Pricing The authors model consumption and dividend growth rates as containing both a small long-run predictable component and fluctuating economic uncertainty (consumption volatility). These dynamics, for which they provide empirical support, in conjunction with generalized recursive preferenc ...
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