IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

The volatility of consumption-based stochastic discount factors and economic cycles

  • Nieto, Belén
  • Rubio, Gonzalo
Registered author(s):

    This paper aims to assess the macroeconomic and financial impact of economic uncertainty using information contained in the second moments of financial risk factors employed in the asset pricing literature. Specifically, we propose the volatility of consumption-based stochastic discount factors (SDFs) as a predictor of future economic and stock market cycles. We employ both contemporaneous and ultimate consumption risk specifications with durable and non-durable consumption. Alternative empirical tests show that this volatility has significant forecasting ability from 1985 to 2006. The degree of predictability tends to dominate that shown by standard predictor variables. We argue that the significant predictability of the volatility of consumption-based SDFs reported in this paper relies mainly on the joint effect of their components.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611000422
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 9 (September)
    Pages: 2197-2216

    as
    in new window

    Handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2197-2216
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

    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.:

    as in new window
    1. Ravi Bansal & Varoujan Khatachtrian & Amir Yaron, 2002. "Interpretable Asset Markets?," NBER Working Papers 9383, National Bureau of Economic Research, Inc.
    2. Martin Lettau & Sydney C. Ludvigson & Jessica A. Wachter, 2008. "The Declining Equity Premium: What Role Does Macroeconomic Risk Play?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1653-1687, July.
    3. Tim Bollerslev & Tzuo Hao & George Tauchen, 2008. "Expected Stock Returns and Variance Risk Premia," CREATES Research Papers 2008-48, School of Economics and Management, University of Aarhus.
    4. Tim Bollerslev & Viktor Todorov, 2009. "Tails, Fears and Risk Premia," CREATES Research Papers 2009-26, School of Economics and Management, University of Aarhus.
    5. Ronald J. Balvers & Dayong Huang, 2005. "Evaluation Of Linear Asset Pricing Models By Implied Portfolio Performance," Working Papers 05-06old2 Classification-, Department of Economics, West Virginia University.
    6. John Y. Campbell & Samuel B. Thompson, 2008. "Predicting Excess Stock Returns Out of Sample: Can Anything Beat the Historical Average?," Review of Financial Studies, Society for Financial Studies, vol. 21(4), pages 1509-1531, July.
    7. Berkelaar, A.B. & Kouwenberg, R.R.P., 2000. "From boom til bust: how loss aversion affects asset prices," Econometric Institute Research Papers EI 2000-21/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
    8. Potì, Valerio & Wang, DengLi, 2010. "The coskewness puzzle," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1827-1838, August.
    9. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
    10. Motohiro Yogo, 2006. "A Consumption-Based Explanation of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 61(2), pages 539-580, 04.
    11. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
    12. Ravi Bansal & Amir Yaron, 2004. "Risks for the Long Run: A Potential Resolution of Asset Pricing Puzzles," Journal of Finance, American Finance Association, vol. 59(4), pages 1481-1509, 08.
    13. Gadi Barlevy, 2003. "The Cost of Business Cycles Under Endogenous Growth," NBER Working Papers 9970, National Bureau of Economic Research, Inc.
    14. Alessandro Beber & Michael W. Brandt, 2010. "When It Cannot Get Better or Worse: The Asymmetric Impact of Good and Bad News on�Bond�Returns in Expansions and Recessions," Review of Finance, European Finance Association, vol. 14(1), pages 119-155.
    15. Yakov Amihud & Clifford Hurvich, 2004. "Predictive Regressions: A Reduced-Bias Estimation Method," Econometrics 0412008, EconWPA.
    16. Mele, Antonio, 2007. "Asymmetric stock market volatility and the cyclical behavior of expected returns," Journal of Financial Economics, Elsevier, vol. 86(2), pages 446-478, November.
    17. John Y. Campbell, 2008. "Viewpoint: Estimating the equity premium," Canadian Journal of Economics, Canadian Economics Association, vol. 41(1), pages 1-21, February.
    18. John H. Cochrane, 2006. "The Dog That Did Not Bark: A Defense of Return Predictability," NBER Working Papers 12026, National Bureau of Economic Research, Inc.
    19. Fabio Fornari & Antonio Mele, 2009. "Financial volatility and economic activity," LSE Research Online Documents on Economics 29309, London School of Economics and Political Science, LSE Library.
    20. Stambaugh, Robert F., 1999. "Predictive regressions," Journal of Financial Economics, Elsevier, vol. 54(3), pages 375-421, December.
    21. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-62, April.
    22. Weinbaum, David, 2010. "Preference heterogeneity and asset prices: An exact solution," Journal of Banking & Finance, Elsevier, vol. 34(9), pages 2238-2246, September.
    23. Jonathan A. Parker, 2001. "The Consumption Risk of the Stock Market," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 32(2), pages 279-348.
    24. Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 60(4), pages 1639-1672, 08.
    25. Alessandro Beber & Michael W. Brandt, 2009. "Resolving Macroeconomic Uncertainty in Stock and Bond Markets," Review of Finance, European Finance Association, vol. 13(1), pages 1-45.
    26. Jackwerth, Jens Carsten & Rubinstein, Mark, 1996. " Recovering Probability Distributions from Option Prices," Journal of Finance, American Finance Association, vol. 51(5), pages 1611-32, December.
    27. Christopher J. Malloy & Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2009. "Long-Run Stockholder Consumption Risk and Asset Returns," Journal of Finance, American Finance Association, vol. 64(6), pages 2427-2479, December.
    28. Campbell, John, 2008. "Estimating the Equity Premium," Scholarly Articles 3196339, Harvard University Department of Economics.
    29. Elena Marquez & Belen Nieto, 2011. "Further international evidence on durable consumption growth and long-run consumption risk," Quantitative Finance, Taylor & Francis Journals, vol. 11(2), pages 195-217.
    30. Lewellen, Jonathan, 2004. "Predicting returns with financial ratios," Journal of Financial Economics, Elsevier, vol. 74(2), pages 209-235, November.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:jbfina:v:35:y:2011:i:9:p:2197-2216. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.