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Federal Reserve Bank of Chicago
Working Paper Series
Consumption-based modeling of long-horizon returns
Kent D. Daniel
David A. Marshall
Abstract

Numerous studies have documented the failure of consumption-based pricing models to explain observed patterns in stock and bond returns. This failure has sometimes been attributed to frictions, transaction costs or durability. If such frictions are important, they should primarily affect the higher frequency components of asset returns. The long-swings, or lower-frequency comovements should be less affected. Consequently if transaction costs are important, tests of the consumption based asset pricing model which concentrate on lower-frequency components may be more successful.


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Kent D. Daniel & David A. Marshall, Consumption-based modeling of long-horizon returns, Federal Reserve Bank of Chicago, Working Paper Series WP-98-18, 1998.
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Keywords: Consumption (Economics) ; Stock - Prices ; Bonds
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