Using Asset Prices to Measure the Cost of Business Cycles

Datos Bibliográficos

ID10183002
AutoresFernando Alvarez (0009-0002-4410-105X, University of Chicago), URBAN J JERMANN (University of Pennsylvania)
Año2004
Volumen112
Número6
Páginas1223-1256
Fecha de publicación2004-11-19
Peer ReviewedSí
Open AccessNo
TipoARTICLE
RevistaJournal of Political Economy (JOURNAL)
Identificadores de la revistaISSN: 0022-3808 • E-ISSN: 1537-534X
EditorialUniversity of Chicago Press (PUBLISHER • US)
DOI10.1086/424738
OpenAlexW2889689669
IdiomaEN
Citas recibidas4
Referencias citadas15

We propose a method to measure the welfare cost of economic fluctuations that does not require full specification of consumer preferences and instead uses asset prices. The method is based on the marginal cost of consumption fluctuations, the per unit benefit of a marginal reduction in consumption fluctuations expressed as a percentage of consumption. We show that this measure is an upper bound for the benefit of reducing all consumption fluctuations. We also clarify the link between the cost of consumption uncertainty, the equity premium, and the slope of the real term structure. To measure the marginal cost of fluctuations, we fit a variety of pricing kernels that reproduce key asset pricing statistics. We find that consumers would be willing to pay a very high price for a reduction in overall consumption uncertainty. However, for consumption fluctuations corresponding to business cycle frequencies, we estimate the marginal cost to be about 0.55% of lifetime consumption based on the period 1889-1997 and about 0.30% based on 1954-97

Asset (computer security · Business cycle · Capital asset pricing model · Consumption (sociology · Consumption-based capital asset pricing model · Econometrics · Economics · Equity premium puzzle · Marginal cost · Marginal utility · Measure (data warehouse · Microeconomics · Climate Change Policy and Economics · Computer Science · Economic theories and models · Monetary Policy and Economic Impact