Consumption-based macroeconomic models of asset pricing theory

Abstract

The family of consumptionbased asset pricing models yields a stochastic discount factor proportional to the marginal rate of intertemporal substitution of consumption. In examining the empirical performance of this class of models, several puzzles are discovered. In this literature review we present the canonical model, the corresponding empirical tests, and different extensions to this model that propose a resolution of these puzzles.

Keywords

• equity premium puzzle
• stochastic discount factor
• marginal rate of intertemporal substitution
• risk-free ratepuzzle
• risk premium
• volatility