Working Paper: NBER ID: w20070
Authors: John Y. Campbell; Carolin Pflueger; Luis M. Viceira
Abstract: Our new model of consumption-based habit formation preferences generates loglinear, homoskedastic macroeconomic dynamics and time-varying risk premia on bonds and stocks. Consumers' first-order condition for the real risk-free interest rate takes the form of an exactly loglinear consumption Euler equation, commonly assumed in New Keynesian models. Estimating the model separately for 1979-2001 and 2001-2011 explains why the exposure of US Treasury bonds to the stock market changed from positive to negative. A change in the comovement between inflation and the output gap explains changing bond risks, but only when risk premia change endogenously as predicted by the model.
Keywords: Consumption-based asset pricing; Risk premia; Macroeconomic dynamics; Bond and stock returns
JEL Codes: E43; E44; E52; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation and output gap (E31) | Bond risks (H74) |
| Risk aversion (D81) | Bond and stock returns (G12) |
| Inflation-output gap dynamics (E31) | Qualitative change in treasury risks (E49) |
| Time-varying risk aversion (D11) | Positive and negative comovement of bonds and stocks (G10) |
| Change in comovement between inflation and output gap (E31) | Change in exposure of U.S. treasury bonds to the stock market (G12) |