Starting from an information process governed by a geometric Brownian motion we show that asset returns are predictable if the elasticity of the pricing kernel is not constant. Declining [Increasing] elasticity of the pricing kernel leads to mean reversion and negatively autocorrelated asset...

This paper analyzes the effect of non-constant elasticity of the pricing kernel on asset return characteristics in a rational expectations model. It is shown that declining elasticity of the pricing kernel can lead to predictability of asset returns and high and persistent volatility. Also,...

In this book the relation between the characteristics of investors' preferences and expectations and equilibrium asset price processes are analysed. It is shown that declining elasticity of the pricing kernel can lead to positive serial correlation of short term asset returns and negative serial...