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Rev Fin 1990; 3:207-232
© 1990 the Society for Financial Studies

Article

Expectations and volatility of consumption and asset returns

S Kandel1 and RF Stambaugh2
1 University of Chicago, Chicago, USA and Tel Aviv University, Tel Aviv, Israel
2 Finance Department, The Wharton School, University of Pennsylvania, Philadelphia, PA 19104-6367, USA

Abstract

We find that conditional means and variances of consumption growth vary through time, and this variation appears to be associated with the business cycle. A pricing model with fluctuating means and variances of consumption growth provides implications about conditional moments of returns for both short and long investment horizons, and these implications are explored empirically. The U-shaped pattern of first-order autocorrelations of returns, as well as business cycle patterns in the price of risk, appears to be consistent with the model, but our exploration suggests that other implications about conditional return moments are at odds with the data.


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