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Low consumption growth tends to occur together with either very high or very low inflation. The probability of low expected consumption growth estimated from a Markov chain for consumption growth and inflation is highly correlated with a measure for the likelihood of consumption disasters suggested by Wachter (2013). A simple asset pricing model with recursive utility and unobservable states reproduces the time variation in volatilities and correlations of stock and bond returns very well.
Author(s):
Ilya Dergunov
Research Center SAFE
Germany
Christoph Meinerding
Goethe University Frankfurt
Germany
Christian Schlag
Goethe University Frankfurt
Germany