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Durable consumption and asset returns: Cointegration analysis

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  • Chen, Guojin
  • Hong, Zhiwu
  • Ren, Yu

Abstract

We incorporate durable consumption and cointegration specifications into a standard consumption asset pricing model, and use a Bayesian stochastic search approach to investigate both the cross-sectional variation in expected asset returns and the time variation in the equity premium at various investment horizons. Using U.S. data, we find that involving durable consumption into the cointegrating equation significantly improves the cross-section explanation of the consumption model. In addition, with the increase of the investment horizon, durable consumption accounts for more time variation of equity premium. Our empirical results indicate that the durable consumption risk should not be ignored in asset pricing.

Suggested Citation

  • Chen, Guojin & Hong, Zhiwu & Ren, Yu, 2016. "Durable consumption and asset returns: Cointegration analysis," Economic Modelling, Elsevier, vol. 53(C), pages 231-244.
    • Handle: RePEc:eee:ecmode:v:53:y:2016:i:c:p:231-244
    DOI: 10.1016/j.econmod.2015.12.008
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    More about this item

    Keywords

    Durable consumption; Cointegration; Consumption asset pricing model; MCMC;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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