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Pricing innovations in consumption growth: A re-evaluation of the recursive utility model

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  • Xiao, Yuchao
  • Faff, Robert
  • Gharghori, Philip
  • Min, Byoung-Kyu

Abstract

We re-evaluate the cross-sectional asset pricing implications of the recursive utility function of Epstein and Zin (1989, 1991), using innovations in future consumption growth in our tests. Our empirical specification helps explain the size, value and momentum effects. Specifically, we find that (і) the beta associated with news about consumption growth has a systematic pattern: beta decreases along the size dimension and increases along the book-to-market and momentum dimensions, (іі) innovation in consumption growth is significantly priced in asset returns using both the Fama and MacBeth (1973) and the stochastic discount factor approaches, and (ііі) the model performs better than both the CAPM and Fama–French model.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 11 ()
Pages: 4465-4475

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:11:p:4465-4475

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

Related research

Keywords: Consumption based asset pricing model; Epstein and Zin’s recursive utility function; Economic tracking portfolio;

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References

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