Asset pricing with consumption-dividend cointegration

This paper develops a representative-agent model where consumption and dividends are cointegrated and examines its asset pricing implications. By specifying the dividend-consumption ratio as a Jacobi process, the model accommodates transitory deviations between dividends and consumption while keeping their ratio stationary. It also yields explicit formulas for equilibrium prices, risk-free rates, and equity premia, revealing countercyclical excess returns, plausible Sharpe ratios, and robust volatility. A calibration to historical U.S. data demonstrates the model’s capacity to match key financial moments, including the equity premium and price-dividend ratios. Overall, dividend-consumption cointegration combines tractability with explanatory power in asset pricing.