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Production‐Based Asset Pricing and the Link Between Stock Returns and Economic Fluctuations
Author(s) -
COCHRANE JOHN H.
Publication year - 1991
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1991.tb03750.x
Subject(s) - stock (firearms) , capital asset pricing model , economics , business cycle , consumption based capital asset pricing model , financial economics , production (economics) , investment (military) , econometrics , microeconomics , macroeconomics , mechanical engineering , politics , political science , law , engineering
This paper describes a production‐based asset pricing model. It is analogous to the standard consumption‐based model, but it uses producers and production functions in the place of consumers and utility functions. The model ties stock returns to investment returns (marginal rates of transformation) which are inferred from investment data via a production function. The production‐based model is used to examine forecasts of stock returns by business‐cycle related variables and the association of stock returns with subsequent economic activity.