John C. Heaton

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Is individual labor income more risky in recessions? This is a difficult question to answer because existing panel data sets are so short. To address this problem, we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced. Variation in the cross-sectional variance between(More)
This paper studies the full equilibrium dynamics of an economy with financial frictions. Due to highly non-linear amplification effects, the economy is prone to instability and occasionally enters volatile crisis episodes. Endogenous risk, driven by asset illiquidity, persists in crisis even for very low levels of exogenous risk. This phenomenon, which we(More)
∗We thank Fernando Alvarez, Ravi Bansal, John Cochrane, Jonathan Parker, Tano Santos, Chris Sims and Pietro Veronesi for valuable comments. We also thank workshop participants at Chicago, Emory, INSEAD, LBS, MIT, Montreal, NBER and Northwestern. Hansen gratefully acknowledges support from the National Science Foundation, Heaton from the Center for Research(More)
We analyze a general equilibrium exchange economy with a continuum of agents who have “catching up with the Joneses” preferences and differ only with respect to the curvature of their utility functions. While individual risk aversion does not change over time, dynamic re-distribution of wealth among the agents leads to countercyclical time variation in the(More)
We develop the utility gradient (or martingale) approach for computing portfolio and consumption plans that maximize stochastic differential utility (SDU), a continuous-time version of recursive utility due to D. Duffie and L. Epstein (1992, Econometrica 60, 353 394). We characterize the first-order conditions of optimality as a system of forward backward(More)
This paper links the firm’s book-to-market ratio and its conditional market beta. If real investment is largely irreversible, the book value of assets of a distressed firm remains fairly constant and its book-to-market ratio is high. Returns on such a firm are sensitive to aggregate conditions. The firm’s extra installed capital capacity allows it to expand(More)
The value premium in U.S. stock returns is robust. The positive relation between average return and book-to-market equity is as strong for 1929-63 as for the subsequent period studied in previous papers. A three-factor risk model explains the value premium better than the hypothesis that the book-to-market characteristic is compensated irrespective of risk(More)
Ongoing questions on the historical mean and standard deviation of the return on equities and bonds and on the equilibrium demand for these securities are addressed in the context of a stationary, overlapping-generations economy in which consumers are subject to a borrowing constraint. The key feature captured by the OLG economy is that the bulk of the(More)
We study portfolio choice when labor income and dividends are cointegrated. Economically plausible calibrations suggest young investors should take substantial short positions in the stock market. Because of cointegration the young agent’s human capital effectively becomes “stock-like.” However, for older agents with shorter times-to-retirement,(More)