We introduce a “bad environment–good environment” (BEGE) technology for consumption growth in a consumption-based asset pricing model with external habit formation. The model generates realistic non-Gaussian features of consumption growth and fits standard salient features of asset prices including the means and volatilities of equity returns and a low risk-free rate. BEGE dynamics additionally allow the model to generate realistic properties of equity index options prices and their comovements with the macroeconomic outlook. In particular, when option-implied volatility is high—as measured, for instance, by the VIX index—the distribution of consumption growth is more negatively skewed.

Drawing on a novel database of the 401(k) plans of 296 firms, we examine the international equity allocations of 3.8 million individuals over the 2005–2011 period. We find enormous cross-individual variation, ranging from zero to more than 75%, and strong cohort effects, with younger cohorts investing more internationally than older ones and each cohort investing more internationally over time. Access to financial advice, lower fees, and more international fund choices are associated with higher international allocations, suggesting a role for plan design and policy. Education, financial literacy, and the fraction of foreign-born population in the ZIP code also have positive effects on international diversification, consistent with explanations based on familiarity bias and information barriers.