Consumption Based Asset Pricing Models

Abstract

In this chapter we give an introduction to the intertemporal consumption based dynamic asset market models using common preferences for the household. These models employ an intertemporal framework and thus represent dynamic asset pricing theories. In the subsequent chapter we will study a prototype asset pricing model that includes production and is based on the stochastic growth or RBC model. Although both chapters dealing with modern asset pricing theory employ utility functions, in some versions of the consumption based asset pricing theory the dividend stream is frequently exogenously given whereas in the model with production the dividend is endogenously generated from the firms’ income. However, we want to note that there are other production based asset pricing models that do not use utility theory, see Cochrane (1991, 1996).