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Time varying consumption covariance and dynamics of the equity premium: Evidence from the G7 countries

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  • Sarkar, Asani
  • Zhang, Lingjia

Abstract

We examine implications of time-varying correlation and covariance between excess equity returns and consumption growth for the equity premium of the G7 countries. We find that the correlation and covariance are higher when there is a negative shock to labor income and a positive shock to returns. The combined effect is that the correlation and covariance are countercyclical and so is the equity premium. We test asset pricing models with time-varying consumption risk and find that the conditional price of risk is generally positive. These results survive several robustness checks. Our results highlight the importance of labor income for understanding dynamics of the equity premium.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 16 (2009)
Issue (Month): 4 (September)
Pages: 613-631

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Handle: RePEc:eee:empfin:v:16:y:2009:i:4:p:613-631

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Web page: http://www.elsevier.com/locate/jempfin

Related research

Keywords: Equity premium Consumption Time-varying Correlation Covariance G7 countries;

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References

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