Abstract
I use index prices and options to estimate the pricing kernel's elasticity, which equals the market price of risk. I show that my estimate predicts future market returns, is priced in a cross-sectional analysis, and that it is highly correlated to business cycle variables. Building on the external habits model of Campbell and Cochrane (1999), I rationalize my results by assuming a time-varying relationship between consumption growth and market returns, and therefore introduce a new way of estimating the latent surplus consumption ratio without using problematic consumption data. My results provide novel empirical support for consumption-based asset pricing models.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
