Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/249177 
Year of Publication: 
2022
Series/Report no.: 
SAFE Working Paper No. 334
Publisher: 
Leibniz Institute for Financial Research SAFE, Frankfurt a. M.
Abstract: 
In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stockbond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.
Subjects: 
Long-run risk
inflation
recursive utility
filtering
disaster risk
JEL: 
E31
E44
G12
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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