Extreme inflation and time-varying expected consumption growth
- In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock- bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Wachter (2013), implying that both the disaster and the long-run risk paradigm can be extended towards explaining movements in the stock-bond correlation.
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| Author: | Ilya Dergunov, Christoph MeinerdingORCiDGND, Christian SchlagORCiDGND |
|---|---|
| URN: | urn:nbn:de:hebis:30:3-619992 |
| URL: | https://ssrn.com/abstract=4001498 |
| DOI: | https://doi.org/10.2139/ssrn.4001498 |
| Parent Title (English): | SAFE working paper ; No. 334 |
| Series (Serial Number): | SAFE working paper (334) |
| Publisher: | SAFE |
| Place of publication: | Frankfurt am Main |
| Document Type: | Working Paper |
| Language: | English |
| Year of Completion: | 2022 |
| Year of first Publication: | 2022 |
| Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
| Release Date: | 2022/01/10 |
| Tag: | Long-run risk; disaster risk; filtering; inflation; recursive utility |
| Issue: | This version: January 3, 2022 |
| Page Number: | 88 |
| Note: | Another version of this paper is available at: Dergunov, Ilya and Meinerding, Christoph and Schlag, Christian, Extreme Inflation and Time-Varying Expected Consumption Growth (April 2, 2019). Available at SSRN: https://ssrn.com/abstract=2832845 or http://dx.doi.org/10.2139/ssrn.2832845 |
| Note: | We gratefully acknowledge research and financial support from the Leibniz Center for Financial Research SAFE (formerly Research Center SAFE, funded by the State of Hessen initiative for research LOEWE). |
| HeBIS-PPN: | 490517412 |
| Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
| Wissenschaftliche Zentren und koordinierte Programme / House of Finance (HoF) | |
| Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
| Wissenschaftliche Zentren und koordinierte Programme / Sustainable Architecture for Finance in Europe (SAFE) | |
| Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
| Sammlungen: | Universitätspublikationen |
| Licence (German): |  Deutsches Urheberrecht |
