Publication: Can output explain the predictability and volatility of stock returns?
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2002-04
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Elsevier
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Abstract
This paper examines whether a general equilibrium asset pricing model can explain two
important empirical regularities of asset returns, extensively documented in the literature: (i)
returns can be predicted by a set of macro variables, and (ii) returns are very volatile. We
derive a closed-form solution for the equilibrium asset pricing model that relates asset returns
to output by using an approximate method proposed by Campbell (Am. Econ. Rev. 83 (1993)
487) and Restoy and Weil (W.P. NBER, No. 6611 (1998)). We obtain evidence on eight
OECD economies using both quarterly and annual observations. Equilibrium models seem to
fin fewer difficultie in explaining the volatility of returns than their predictability for general
output processes. In the case of the US, the observed predictability and volatility of asset
returns, for annual frequencies, are broadly compatible with the predictions of equilibrium
models for a reasonable
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Keywords
Generalized isoelastic preferences, Asset returns, Real activity, Volatility
Bibliographic citation
Journal of international money and finance, vol, 21, n. 2, apr. 2002, pp. 163-182