Consumption Risk and Expected Stock Returns
AbstractFollowing the textbook C-CAPM, the consumption risk of an asset is typically measured as the contemporaneous covariance of the marginal utility of consumption and the return on that asset. When measured this way, consumption risk is too small to explain the observed equity premium, is negatively related to expected excess returns over time, and fails to explain the cross-sectional differences in average returns of the Fama and French (25) portfolios. This paper evaluates the central insight of the C-CAPM - that consumption risk determines returns - but take the model less literally by allowing the possibility that households do not instantaneously and completely adjust consumption to the news revealed about wealth in a period. The long-term consumption risk of the aggregate market is signficantly larger than the contemporaneous risk and is positively related to expected excess returns over time. The long-term consumption risk of different portfolios largely explains the observed differences in average returns.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 93 (2003)
Issue (Month): 2 (May)
Other versions of this item:
- Jonathan A. Parker, 2003. "Consumption Risk And Expected Stock Returns," Working Papers 144, Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics..
- Jonathan A. Parker, 2003. "Consumption Risk and Expected Stock Returns," NBER Working Papers 9548, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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