Prices, Consumption, and Dividends Over the Business Cycle: A Tale of Two Regimes / Anisha Ghosh, George M. Constantinides.

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Ghosh, Anisha

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w20678.Publication details: Cambridge, Mass. National Bureau of Economic Research 2014.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: An economy in which investors know the true model and its parameters and filter the regime probability from aggregate consumption history has been empirically rejected. Hypothesizing that prices partly reflect investorsʼ belief about the regime, we infer beliefs from prices. The model fits well the moments of the market return, risk free rate, and price-dividend ratio. Consistent with the data, it implies higher mean and lower volatility of consumption and dividend growth rates, lower mean and volatility of the market return and equity premium, and higher mean of the price-dividend ratio in the first regime compared with the second one. The probability of recession in a year is 62:5% (23:7%) if the probability of being in the first regime at the beginning of the year is lower (higher) than 50%. The results support the hypothesis that investors employ a broader information set than just aggregate consumption history in forming their beliefs.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w20678 (Browse shelf(Opens below))	Not For Loan

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November 2014.

An economy in which investors know the true model and its parameters and filter the regime probability from aggregate consumption history has been empirically rejected. Hypothesizing that prices partly reflect investorsʼ belief about the regime, we infer beliefs from prices. The model fits well the moments of the market return, risk free rate, and price-dividend ratio. Consistent with the data, it implies higher mean and lower volatility of consumption and dividend growth rates, lower mean and volatility of the market return and equity premium, and higher mean of the price-dividend ratio in the first regime compared with the second one. The probability of recession in a year is 62:5% (23:7%) if the probability of being in the first regime at the beginning of the year is lower (higher) than 50%. The results support the hypothesis that investors employ a broader information set than just aggregate consumption history in forming their beliefs.