JOHN COCHRANE – FINANCIAL MARKETS AND THE REAL ECONOMY

The intersection of macroeconomics and finance is examined. The key challenge in this area is to find the right measure of bad times to explain some assets’ high average returns or low prices as compensation for their tendency to pay off poorly in bad times.

FINANCIAL MARKETS AND THE REAL ECONOMY

John H. Cochrane is Professor of Finance at the University of Chicago Graduate School of Business.

The intersection of macroeconomics and finance is examined in this collection. The key challenge in this area is to find the right measure of bad times to explain some assets’ high average returns or low prices as compensation for their tendency to pay off poorly in bad times.

What are the macroeconomic risks that affect asset prices? The question is important to macroeconomics. Understanding the prices of assets that carry macroeconomic risks is a better way to learn about the risks of recessions and depressions. The core of finance is the question. Finance has been wondering if asset prices are rational. The term only means if asset prices are connected to macroeconomic risks. The macroeconomics of finance are reviewed in Financial Markets and the Real Economy. The important facts include the equity premium, size and value effects, and the predictability of returns. The most basic challenge to the connection between asset prices and macroeconomics is the equity premium puzzle. It surveys the current state of consumption-based models. It covers models that tie asset returns to output and investment. It surveys the importance of labor income and risk in understanding asset markets. The most current and comprehensive review on the subject will be of interest to both macroeconomists and financial economists. 1. There is an introduction and a second one. The business cycle correlation of expected returns is one of the facts. The Equity Premium is 4. There are 5 models of consumption. Production, Investment and General Equilibrium; 6. Labor Income and Idiosyncratic Risk are related. References for challenges for the future.

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