Working Paper: NBER ID: w5610
Authors: John Y. Campbell
Abstract: This paper reviews the behavior of stock prices in relation to consumption. The paper lists some important stylized facts that characterize US data, and relates them to recent developments in equilibrium asset pricing theory. Data from other countries are examined to see which features of the US experience apply more generally. The paper argues that to make sense of stock market behavior one needs a model in which investors' risk aversion is both high and varying, such as the external habit-formation model of Campbell and Cochrane (1995).
Keywords: Consumption; Stock Market; Risk Aversion; Equity Premium; Volatility
JEL Codes: G12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Consumption (E21) | Stock Returns (G12) |
| Stock Returns (G12) | Risk Aversion (D81) |
| Risk Aversion (D81) | Stock Market Volatility (G17) |
| Smooth Consumption Growth (E21) | Low Covariance of Stock Returns with Consumption Growth (E21) |
| Low Covariance of Stock Returns with Consumption Growth (E21) | High Equity Premium (G19) |
| Changes in Expectations Regarding Future Dividends and Returns (D84) | Stock Market Volatility (G17) |