Macro-Finance. (2nd March 2017)

• Record Type: Journal Article
• Authors: Cochrane, John H
• Is Part Of: Review of finance. Volume 21:Number 3(2017)
• Page Start: 945
• Page End: 985
• Publication Date: 2017-03-02
• Subjects: Macro-finance -- Equity premium -- Volatility Received December 30, 2016; accepted January 23, 2017 by Editor Alex Edmans.; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfx010
• Languages: English
• ISSNs: 1572-3097

Abstract

Abstract: Macro-finance addresses the link between asset prices and economic fluctuations. Many models reflect the same rough idea: the market's ability to bear risk is greater in good times, and less in bad times. Models achieve this similar result by quite different mechanisms. I contrast their strengths and weaknesses. I highlight directions for future research, including additional facts to be matched, and limitations of the models that should prod future theoretical work. I describe how macro-finance models can fundamentally alter macroeconomics, by putting time-varying risk premiums and risk-bearing capacity at the center of recessions rather than variation in the interest rate and intertemporal substitution.