We develop a nonlinear state-space model to capture the joint dynamics of consumption, dividend growth, and asset returns. Building on Bansal and Yaron (2004), the core of our model consists of an endowment economy that is, in part, driven by a common predictable component for consumption and...

In this paper we show that measures of economic uncertainty (conditional volatilityof consumption) predict and are predicted by valuation ratios at long horizons. Furtherwe document that asset valuations drop as economic uncertainty rises — that is,financial markets dislike economic...