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Risk and Return: Consumption versus Market Beta

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  • N. Gregory Mankiw
  • Matthew D. Shapiro

Abstract

The interaction between the macroeconomy and asset markets is central to a variety of modern theories of the business cycle. Much recentwork emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.

Suggested Citation

  • N. Gregory Mankiw & Matthew D. Shapiro, 1984. "Risk and Return: Consumption versus Market Beta," NBER Working Papers 1399, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:1399
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    Cited by:

    1. Claessens, Stijn & Moon-Whoan Rhee & DEC, 1994. "The effects of barriers on equity investment in developing countries," Policy Research Working Paper Series 1263, The World Bank.
    2. Terry A. Marsh, 1985. "Asset Pricing Model Specification and the Term Structure Evidence," NBER Working Papers 1612, National Bureau of Economic Research, Inc.
    3. Petko Kalev & Brett Inder, 2006. "The information content of the term structure of interest rates," Applied Economics, Taylor & Francis Journals, vol. 38(1), pages 33-45.
    4. Grossman, Sanford J & Laroque, Guy, 1990. "Asset Pricing and Optimal Portfolio Choice in the Presence of Illiquid Durable Consumption Goods," Econometrica, Econometric Society, vol. 58(1), pages 25-51, January.
    5. Vaz de Castro, Afonso, 2022. "Risk Aversion and Recessive Impacts of Austerity," MPRA Paper 111875, University Library of Munich, Germany.
    6. Accolley, Delali, 2021. "Some Markov-Switching Models for the Toronto Stock Exchange," MPRA Paper 108072, University Library of Munich, Germany.
    7. Man Fu & Prasad V. Bidarkota, 2011. "Periodically Collapsing Bubbles in Stock Prices Cointegrated with Broad Dividends and Macroeconomic Factors," JRFM, MDPI, vol. 4(1), pages 1-36, December.

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