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Ultimate consumption risk and investment-based stock returns

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  • Kang, Hankil
  • Kang, Jangkoo
  • Lee, Changjun

Abstract

Motivated by recent works documenting that the returns formed on real investment predict aggregate economic activities, we study whether the ultimate consumption model proposed by Parker and Julliard (2005) explains the cross-section of investment-based stock returns. We find that the ultimate consumption model with horizons from 3 to 4years outperforms the contemporaneous consumption model. The linearized model’s performance is better than that of the Fama-French three-factor model and comparable to that of the Chen-Roll-Ross model. The explanatory power of the ultimate consumption model arises from the close business-cycle relationship between the ultimate consumption growth and the investment-based returns.

Suggested Citation

  • Kang, Hankil & Kang, Jangkoo & Lee, Changjun, 2017. "Ultimate consumption risk and investment-based stock returns," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 473-486.
  • Handle: RePEc:eee:ecofin:v:42:y:2017:i:c:p:473-486
    DOI: 10.1016/j.najef.2017.08.008
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    More about this item

    Keywords

    Ultimate consumption risk; Long-run risk; Investment-based portfolio; Expected return;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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