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We present a consumption‐based model that explains a wide variety of dynamic asset pricing phenomena, including the procyclical variation of stock prices, the long‐horizon predictability of excess stock returns, and the countercyclical variation of stock market volatility. The model captures much of the history of stock prices from consumption data. It explains the short‐and long‐run equity premium puzzles despite a low and constant risk‐free rate. The results are essentially the same whether we model stocks as a claim to the consumption stream or as a claim to volatile dividends poorly corelated with consumption. The model is driven by an independently and identically distributed consumption growth process and adds a slow ‐moving external habit to the standard power utility function. These features generate slow countercyclical variation in risk premia. The model posits a fundamentally novel description of risk …