This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Consumption Risk And Expected Stock Returns

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jonathan A. Parker (Princeton University and NBER)

Additional information is available for the following registered author(s):

Abstract

Following the textbook CCAPM, the consumption risk of an asset is typically measured as the contemporaneous covariance of the marginal utility of consumption and the return on that asset. When measured this way, consumption risk is too small to explain the observed equity premium, is negatively related to expected excess returns over time, and fails to explain the cross-sectional differences in average returns of the Fama and French (25) portfolios. This paper evaluates the central insight of the CCAPM — that consumption risk determines returns — but take the model less literally by allowing the possibility that households do not instantaneously and completely adjust consumption to the news revealed about wealth in a period. The long-term consumption risk of the aggregate market is signficantly larger than the contemporaneous risk and is positively related to expected excess returns over time. The long-term consumption risk of different portfolios largely explains the observed differences in average returns.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.wws.princeton.edu/econdp/pdf/dp223.pdf
File Format:
File Function:
Download Restriction: no

Publisher Info
Paper provided by Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics. in its series Working Papers with number 144.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Jan 2003
Date of revision:
Handle: RePEc:pri:wwseco:144

Contact details of provider:
Postal: Robertson Hall, Princeton, NJ 08544-1013
Phone: (609) 258-4800
Web page: http://webdb.princeton.edu/dbtoolbox/query.asp?qname=Papers_Econ_IndexWRecent
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (David Long).

Related research
Keywords: Consumption Capital Asset Pricing Model Expected returns Equity premium Consumption risk Consumption smoothing

Other versions of this item:

Find related papers by JEL classification:
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

References listed on IDEAS
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.:

  1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June. [Downloadable!] (restricted)
  2. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September. [Downloadable!] (restricted)
  3. David A. Marshall & Nayan G. Parekh, 1999. "Can Costs of Consumption Adjustment Explain Asset Pricing Puzzles?," Journal of Finance, American Finance Association, vol. 54(2), pages 623-654, 04. [Downloadable!] (restricted)
  4. Mark Rubinstein, 1976. "The Valuation of Uncertain Income Streams and the Pricing of Options," Bell Journal of Economics, The RAND Corporation, vol. 7(2), pages 407-425, Autumn. [Downloadable!] (restricted)
  5. Yacine Ait-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2001. "Luxury Goods and the Equity Premium," NBER Working Papers 8417, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Jonathan A. Parker, 2001. "The Consumption Risk of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2001-2), pages 279-348. [Downloadable!]
  7. Xavier Gabaix & David Laibson, 2002. "The 6D Bias and the Equity Premium Puzzle," Harvard Institute of Economic Research Working Papers 1947, Harvard - Institute of Economic Research. [Downloadable!]
  8. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  9. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April. [Downloadable!] (restricted)
  10. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-27, May. [Downloadable!] (restricted)
    Other versions:
  11. Lynch, Anthony W, 1996. " Decision Frequency and Synchronization across Agents: Implications for Aggregate Consumption and Equity Return," Journal of Finance, American Finance Association, vol. 51(4), pages 1479-97, September. [Downloadable!] (restricted)
  12. Robert J. Shiller, 1982. "Consumption, Asset Markets, and Macroeconomic Fluctuations," NBER Working Papers 0838, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  13. Mankiw, N Gregory & Shapiro, Matthew D, 1986. "Risk and Return: Consumption Beta versus Market Beta," The Review of Economics and Statistics, MIT Press, vol. 68(3), pages 452-59, August. [Downloadable!] (restricted)
    Other versions:
  14. Robert E. Hall, 1979. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," NBER Reprints 0015, National Bureau of Economic Research, Inc.
    Other versions:
  15. Shiller, Robert J., 1982. "Consumption, asset markets and macroeconomic fluctuations," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 17, pages 203-238. [Downloadable!] (restricted)
  16. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October. [Downloadable!] (restricted)
Full references

Cited by:
(explanations, 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.)

  1. Eva Ferreira & María Isabel Martínez & Eliseo Navarro & Gonzalo Rubio, 2005. "Consumer Confidence and Yield Spreads in Europe," DFAEII Working Papers 200511, University of the Basque Country - Department of Foundations of Economic Analysis II. [Downloadable!]
  2. Yulei Luo, 2006. "Rational Inattention, Portfolio Choice, and the Equity Premium," Computing in Economics and Finance 2006 56, Society for Computational Economics. [Downloadable!]
Statistics
Access and download statistics

Did you know? Data contributors to RePEc receive monthly emails with details about downloads and abstract views of their works.

This page was last updated on 2008-8-19.

This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.