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Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns

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  • Kris Jacobs

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  • Kevin Q. Wang
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    Abstract

    This paper investigates the importance of idiosyncratic consumption risk for the cross-sectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We offer evidence that the cross-sectional variance of consumption growth is also a priced factor. This demonstrates that consumers are not fully insured against idiosyncratic consumption risk, and that asset returns reflect their attempts to reduce their exposure to this risk. We find that over the sample period the resulting two-factor consumption-based asset pricing model significantly outperforms the CAPM. The model's empirical performance also compares favorably with that of the Fama-French three-factor model. Moreover, in the presence of the market factor and the size and book-to-market factors, the two consumption based factors retain explanatory power. Together with the results of Lettau and Ludvigson (2000), these findings indicate that consumption-based asset pricing is relevant for explaining the cross-section of asset returns. Cet article analyse l'importance du risque idiosyncratique de la consommation individuelle pour la variance transversale des rendements moyens des actifs et des obligations. Lorsque l'on n'attribue pas de prix au risque idiosyncratique de la consommation individuelle, le seul facteur d'évaluation dans une économie à plusieurs horizons est le taux de croissance de la consommation agrégée. Nous montrons que la variance transversale de la croissance de la consommation est également un facteur dont le prix est déterminé. Ceci démontre que les consommateurs ne sont pas complètement assurés contre le risque idiosyncratique de la consommation et que les rendements des actifs reflètent leurs efforts à réduire leur exposition à ce risque. Pour la période considérée, nous trouvons que le modèle d'évaluation d'actifs à deux facteurs basés sur la consommation donne de meilleurs résultats que le CAPM. De plus, la performance empirique du modèle se compare favorablement avec celle du modèle à trois facteurs de Fama-French. Par ailleurs, en présence du facteur de marché et des facteurs taille et ratio valeur comptable/cours, les deux facteurs basés sur la consommation conservent leur pouvoir explicatif. Combiné aux résultats de Lettau et Ludvigson (2000), ces résultats indiquent que l'évaluation d'actifs à partir de la consommation sert à expliquer l'intégralité des rendements d'actifs.

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    Bibliographic Info

    Paper provided by CIRANO in its series CIRANO Working Papers with number 2002s-11.

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    Date of creation: 01 Feb 2002
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    Handle: RePEc:cir:cirwor:2002s-11

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    Keywords: cross-sectional asset pricing; consumption-based model; idiosyncratic consumption risk; incomplete markets; measurement error; évaluation d'actifs transversale; modèle basé sur la consommation; risque de consommation idiosyncratique; marchés incomplets; erreur de mesure;

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