Abstract I extend the consumption capital asset pricing model to incorporate expanding product variety over time and states of nature. In the model, consumers have a love of variety, and… Click to show full abstract
Abstract I extend the consumption capital asset pricing model to incorporate expanding product variety over time and states of nature. In the model, consumers have a love of variety, and consumption consists of different components: product groups and brands. By raising future marginal utility, growth in product groups increases the incentive to save and reduces the risk-free rate. By making marginal utility more volatile, variation in brand and quality growth magnifies consumption risk and raises the equity premium. Embedding new goods in a long-run risk setting has similar implications.
               
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