Consumption growth and time-varying expected stock returns
AbstractWhen the consumption growth rate is measured based upon fourth quarter data, it tracks predictable variation in future excess stock returns. Low fourth quarter consumption growth rates predict high future excess stock returns such that expected returns are high at business cycle troughs and low at business cycle peaks. The consumption growth rate loses predictive power when it is measured based upon other quarters. This is consistent with the insight of Jagannathan and Wang [2007. Journal of Finance 62, 1623-1661] that investors tend to review their consumption and investment plans during the end of each calendar year, and at possibly random times in between. The consumption growth rate measured based upon fourth quarter data is a much stronger predictive variable than benchmark predictive variables such as the dividend-price ratio, the term spread, and the default spread.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Finance Research Letters.
Volume (Year): 5 (2008)
Issue (Month): 3 (September)
Contact details of provider:
Web page: http://www.elsevier.com/locate/frl
Return predictability Consumption growth;
Other versions of this item:
- Stig Vinther Møller, 2008. "Consumption growth and time-varying expected stock returns," CREATES Research Papers 2008-40, School of Economics and Management, University of Aarhus.
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Fama, Eugene F. & French, Kenneth R., 1989. "Business conditions and expected returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 25(1), pages 23-49, November.
- Goetzman, W.N. & Jorion, P., 1992.
"Testing the Predictive Power of Dividend Yields,"
93-03, Columbia - Graduate School of Business.
- Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October.
- Robert F. Stambaugh, 1999.
NBER Technical Working Papers
0240, National Bureau of Economic Research, Inc.
- Kothari, S. P. & Shanken, Jay, 1997. "Book-to-market, dividend yield, and expected market returns: A time-series analysis," Journal of Financial Economics, Elsevier, vol. 44(2), pages 169-203, May.
- Whitney K. Newey & Kenneth D. West, 1986.
"A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix,"
NBER Technical Working Papers
0055, National Bureau of Economic Research, Inc.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
- Nelson, Charles R & Kim, Myung J, 1993. " Predictable Stock Returns: The Role of Small Sample Bias," Journal of Finance, American Finance Association, vol. 48(2), pages 641-61, June.
- John Y. Campbell & Robert J. Shiller, 1989.
"The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors,"
NBER Working Papers
2100, National Bureau of Economic Research, Inc.
- John Y. Campbell, Robert J. Shiller, 1988. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Review of Financial Studies, Society for Financial Studies, vol. 1(3), pages 195-228.
- Robert J. Shiller & John Y. Campbell, 1986. "The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors," Cowles Foundation Discussion Papers 812, Cowles Foundation for Research in Economics, Yale University.
- Ravi Jagannathan & Yong Wang, 2007. "Lazy Investors, Discretionary Consumption, and the Cross-Section of Stock Returns," Journal of Finance, American Finance Association, vol. 62(4), pages 1623-1661, 08.
- Martin Lettau, 2001.
"Consumption, Aggregate Wealth, and Expected Stock Returns,"
Journal of Finance,
American Finance Association, vol. 56(3), pages 815-849, 06.
- Sydney Ludvigson & Martin Lettau, 1999. "Consumption, aggregate wealth and expected stock returns," Staff Reports 77, Federal Reserve Bank of New York.
- Lettau, Martin & Ludvigson, Sydney, 1999. "Consumption, Aggregate Wealth and Expected Stock Returns," CEPR Discussion Papers 2223, C.E.P.R. Discussion Papers.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2011.
"Natural Expectations, Macroeconomic Dynamics, and Asset Pricing,"
in: NBER Macroeconomics Annual 2011, Volume 26, pages 1-48
National Bureau of Economic Research, Inc.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2012. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 1 - 48.
- Andreas Fuster & Benjamin Hebert & David Laibson, 2011. "Natural Expectations, Macroeconomic Dynamics, and Asset Pricing," NBER Working Papers 17301, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wendy Shamier).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.