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Business-cycle consumption risk and asset prices

Author

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  • Bandi, Federico M.
  • Tamoni, Andrea

Abstract

Aggregation is routinely employed in asset pricing to capture frequency-specific effects. We formalize the theoretical mapping between aggregates of time series and their frequency-specific components as well as the mapping between factor loadings obtained upon aggregation of returns and factors and frequency-specific factor loadings. We show that business-cycle consumption, a component of the consumption growth process with cycles between 4 and 8 years, provides valuable pricing signal. In agreement with the implications of theory, we document that consumption growth aggregated over a 4-year horizon (4-year consumption) has analogous pricing ability, cross-sectionally and in the time series, to business-cycle consumption.

Suggested Citation

  • Bandi, Federico M. & Tamoni, Andrea, 2023. "Business-cycle consumption risk and asset prices," Journal of Econometrics, Elsevier, vol. 237(2).
    • Handle: RePEc:eee:econom:v:237:y:2023:i:2:s0304407623001410
    DOI: 10.1016/j.jeconom.2022.11.012
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    More about this item

    Keywords

    CCAPM; Business-cycle consumption; Frequency; Aggregation; Return predictability;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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