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Composition of wealth, conditioning information, and the cross-section of stock returns

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  • Roussanov, Nikolai

Abstract

Value stocks covary with aggregate consumption more than growth stocks during periods when financial wealth is low relative to consumption. However, the conditional value premium does not exhibit such countercyclical behavior. Consequently, a one-factor conditional consumption-based asset pricing model can be rejected without making any arbitrary assumptions on the dynamics of the price of risk or the conditional moments. Empirical evidence is somewhat more consistent with a consumption-based model augmented with an aggregate wealth growth factor, which can be motivated by either recursive preferences or relative wealth concerns.

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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 111 (2014)
Issue (Month): 2 ()
Pages: 352-380

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Handle: RePEc:eee:jfinec:v:111:y:2014:i:2:p:352-380

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Linear factor models; Conditioning information; Nonparametric estimation; Value premium; Relative wealth concerns;

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Cited by:
  1. Jerry Tsai & Jessica A. Wachter, 2014. "Rare Booms and Disasters in a Multi-sector Endowment Economy," NBER Working Papers 20062, National Bureau of Economic Research, Inc.
  2. Hanno Lustig & Adrien Verdelhan, 2006. "The Cross-Section of Foreign Currency Risk Premia and Consumption Growth Risk," Boston University - Department of Economics - Working Papers Series WP2006-045, Boston University - Department of Economics.
  3. Anthony W. Lynch & Oliver Randall, 2011. "Why Surplus Consumption in the Habit Model May be Less Persistent than You Think," NBER Working Papers 16950, National Bureau of Economic Research, Inc.

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