The volatility of consumption-based stochastic discount factors and economic cycles
This paper aims to assess the macroeconomic and financial impact of economic uncertainty using information contained in the second moments of financial risk factors employed in the asset pricing literature. Specifically, we propose the volatility of consumption-based stochastic discount factors (SDFs) as a predictor of future economic and stock market cycles. We employ both contemporaneous and ultimate consumption risk specifications with durable and non-durable consumption. Alternative empirical tests show that this volatility has significant forecasting ability from 1985 to 2006. The degree of predictability tends to dominate that shown by standard predictor variables. We argue that the significant predictability of the volatility of consumption-based SDFs reported in this paper relies mainly on the joint effect of their components.
Year of publication: |
2011
|
---|---|
Authors: | Nieto, Belén ; Rubio, Gonzalo |
Published in: |
Journal of Banking & Finance. - Elsevier, ISSN 0378-4266. - Vol. 35.2011, 9, p. 2197-2216
|
Publisher: |
Elsevier |
Keywords: | Stochastic discount factor Economic cycles Volatility of stochastic discount factor Consumption Risk aversion |
Saved in:
Online Resource
Saved in favorites
Similar items by person
-
Novales, Alfonso, (2011)
-
Variance Swaps and Intertemporal Asset Pricing
Novales, Alfonso, (2011)
-
Variance swaps, non-normality and macroeconomic and financial risks
Nieto, Belén, (2014)
- More ...