The rest of the paper is organized as follows. Section I lays out the household’s consumption and portfolio choice problemwith a durable consumption good and derives the Euler equations. Section II describes the consumption data used in the empirical work. The service f low for durable goods (as defined in the national accounts) is more cyclical than the service f low for nondurable goods and services. The high cyclicality of the service f low, rather than durability of the good, is the key ingredient in explaining the known facts about expected stock returns
