This paper reviews the behavior of stock prices in relation to consumption. The paper
lists some important stylized facts that characterize US data, and relates them to
recent developments in equilibrium asset pricing theory. Data from other countries
are examined to see which features of the US experience apply more generally. The
paper argues that to make sense of stock market behavior one needs a model in which
investors' risk aversion is both high and varying, such as the external habit-formation
model of Campbell and Cochrane (1995).