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 Schlag
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 series (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:Universit├Ątsbibliothek 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).
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:Universit├Ątspublikationen
Licence (German):License LogoDeutsches Urheberrecht