Essays on consumption-based asset pricing

My dissertation aims at understanding the economic force behind the success of long-run consumption-based asset pricing models, it consists of three chapters. It also provides us a new approach to test consumption-based asset pricing models. Chapter one provides a brief summary of the dissertation.; In the second chapter, we develop a theoretical model in order to understand co-movements between asset returns and consumption over short and long horizons. We present an intertemporal general equilibrium model featuring two types of shocks: "small", frequent and disembodied shocks to productivity and "large" technological innovations, which are embodied into new vintages of the capital stock. The latter types of shocks affect the economy with lags, since firms need to invest before they can take advantage of the new technologies. The delayed reaction of consumption to a large technological innovation helps us explain why short run correlations between returns and consumption growth are weaker than their long run counterparts. Because of this effect, the model can shed some light into the economic mechanisms that make consumption based asset pricing more successful at long horizons/low frequencies compared to short horizons/high frequencies.; The third chapter examines a new set of implications of existing asset pricing models for the correlation between returns and consumption growth over the short and the long run. The findings suggest that external habit formation models face a challenge in producing two robust facts in aggregate data, namely, that stock market returns lead consumption growth, and that the correlation between returns and consumption growth is higher at low frequencies than it is at high frequencies. To reconcile these facts with a consumption-based model, I show that one needs to focus on models that contain a "forward looking" consumption component, i.e., models that allow for both trend and cyclical fluctuations in consumption, and that link expected returns to the cyclical fluctuations in consumption. The models by Barisal and Yaron (2004) and Panageas and Yu (2005) developed in the second chapter provide examples of such models.