Working Paper: NBER ID: w2776
Authors: John H. Cochrane
Abstract: This paper exploits producer's first order conditions to link asset prices to data on investment, output, etc. through marginal rates of transformation, just as consumer's first order conditions are commonly used to link asset prices to consumption data or proxies through marginal rates of substitution. It presents simulation economies analogous to the consumption based models of Mehra and Prescott (1985) and Backus, Gregory and Ziri (1986) that capture the size of the equity premium and the size and cyclical timing of the forward rate term premium
Keywords: Asset Pricing; Production; Equity Premium; Term Premium
JEL Codes: G12; E22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment decisions (G11) | Asset prices (G19) |
| Marginal rate of transformation between state and date contingent claims (G19) | Price ratios of such claims (G19) |
| Dynamics of investment and consumption (E20) | Size of the equity premium (G12) |
| Dynamics of investment and consumption (E20) | Cyclical timing of the forward rate term premium (E43) |
| Production variables (E23) | Asset prices (G19) |