The impact of separate processes of aggregate dividends and consumption on asset pricing with fat tails

摘要

This paper studies a consumption-based asset pricing model in which aggregate dividends and consumption are modeled as different processes with stable shocks. The model yields mean equity returns larger to accord with the historical data than the standard framework with the assumption that dividends are identical to total consumption. This improves the potential of fat tails to explain the equity premium puzzle further. With more realistic assumption of exogenous endowment sequences, this new model also lays a broader foundation for other asset pricing models with fat tails.