Empirical Asset Pricing

Class 2: Consumption-Based Asset-Pricing Models

Jun Pan

Shanghai Advanced Institute of Finance

Shanghai Jiao Tong University

November 11, 2019

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Hansen and Singleton (1984), ERRATA

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Campbell (2003), Table 1

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Campbell (2003), Table 2

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Campbell (2003), Table 3

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Data

2.5 30
Annualized mean = 7.31%; std=16.75%;
annualized mean = 2.44%, std = 0.94%, autocorr=5%
autocorr=33.07% corrcoef(y,R) = 21.07%
2
20

1.5
10

1
0

0.5

−10
0

−20
−0.5

−30
−1

−1.5 −40
1950 1960 1970 1980 1990 2000 2010 1950 1960 1970 1980 1990 2000 2010

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Data

2.5 2.5
Annualized mean = 1.44%; std=1.15%.
annualized mean = 2.44%, std = 0.94%,
autocorr=71.09%
autocorr=33.07% 2
2 corr(RF,y)=18.92%; corr(RF,R)=11.69%.

1.5
1.5

1
1

0.5
0.5
0

0
−0.5

−0.5
−1

−1 −1.5

−1.5 −2
1950 1960 1970 1980 1990 2000 2010 1950 1960 1970 1980 1990 2000 2010

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Equity minus RiskFree
0.05

0.04

0.03

0.02

0.01

γ*= 160

−0.01
0 50 100 150 200 250 300 350 400
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Hansen and Singleton (1983)

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Campbell (2003), Table 4

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Campbell (2003), Table 5

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Other Consumption-Based Asset Pricing Models
Power utility, one good with a low probability crash state, Rietz (1988).
Models with durable goods, e.g., Dunn and Singleton (1986), Eichenbaum and
Hansen (1990), Yogo (2006).
Models with luxury goods, e.g., Aït-Sahalia, Parker, and Yogo (2004).
Separating risk aversion and intertemporal substitution, e.g., Epstein and Zin (1989,
1991) and Weil (1989).
Habit formation, e.g., Campbell and Cochrane (1999).
Prospect theory, e.g., Barberis, Huang and Santos (2001).
Uncertainty aversion, e.g., Maenhout (2004).
Long run risks, e.g., Bansal and Yaron (2004), Parker and Julliard (2005),
Jagannathan and Wang (2005), Hansen, Heaton, and Li (2006).
Interactions of heterogeneous investors, e.g., Constantinides and Duffie (1996),
Wang (1996), Chan and Kogan (2002); Micro-level studies, e.g., Zeldes (1991),
Heaton and Lucas (1996), Parker (2001), Brunnermeier and Nagel (2006), Malloy,
Moskowitz, and Vissing-Jorgensen (2006).
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NBER Dated Recessions (shaded areas)

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Campbell and Cochrane (1999), Parameter Choices

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Sensitivity Function λ(s)

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Price-Consumption Ratio and Expected Returns

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Return Volatility and Sharpe Ratio

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Price-Dividend Ratio

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