Date of Original Version



Working Paper

Rights Management

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Abstract or Description

We model consumption and dividend growth as different processes across two latent regimes. We estimate the equilibrium model over 1930-2009 and show that the second regime is associated with recessions, market downturns, higher risk premia, lower consumption and dividend growth, higher volatility of returns and growth rates, and lower market-wide price-dividend ratio. The model performs better at in-sample forecasting and significantly better at out- of-sample prediction of the equity, size, and value premia and consumption and dividend growth rates and their variances than the price-dividend ratio and risk free rate do. The calibrated model replicates several features of the data.