Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/196133
Authors: 
Dergunov, Ilya
Meinerding, Christoph
Schlag, Christian
Year of Publication: 
2019
Series/Report no.: 
Bundesbank Discussion Paper 16/2019
Abstract: 
In a parsimonious regime switching model, expected consumption growth varies over time. Adding in ation as a conditioning variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected in ation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock-bond return correlations. Furthermore, they provide an alternative way to come up with a measure of time-varying disaster risk in the spirit of Wachter (2013). Our findings imply that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond return correlation.
Subjects: 
long-run risk
inflation
recursive utility
filtering
disaster risk
JEL: 
E31
E44
G12
ISBN: 
978-3-95729-584-2
Document Type: 
Working Paper
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