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Asset pricing and energy consumption risk

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  • Ashley Lim
  • Yihui Lan
  • Sirimon Treepongkaruna

Abstract

This paper proposes energy consumption in the US as a new measure for the consumption capital asset pricing model. We find that (i) industrial energy growth produces reasonable values for the relative risk aversion coefficient and the implied risk‐free rate; (ii) compared to alternative consumption measures, industrial energy performs well in explaining the cross‐sectional variation in stock returns with the lowest implied risk aversion and pricing errors; (iii) the industrial energy consumption risk model performs equally well as the Fama–French three‐factor model in the cross‐sectional asset pricing tests; and (iv) total energy consumption risk is priced in the presence of the Fama–French factor risks.

Suggested Citation

  • Ashley Lim & Yihui Lan & Sirimon Treepongkaruna, 2020. "Asset pricing and energy consumption risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3813-3850, December.
  • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:3813-3850
    DOI: 10.1111/acfi.12516
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