New Goods and Asset Prices

Abstract

I propose an extension to the consumption capital asset pricing model to incorporate the introduction of new goods over time and states of nature. In the model, consumers have a love of variety, and consumption consists of different components: product groups and brands. Expected growth in product groups increases expected future marginal utility - thereby raising the incentive to save and reducing the risk-free rate of interest. Meanwhile, cyclical variation in brand and quality growth makes marginal utility more volatile and countercyclical - thereby raising the expected equity premium.