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Household Production and Asset Prices

Author

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  • Zhi Da

    (Finance Department, Mendoza College of Business, University of Notre Dame, Notre Dame, Indiana 46556)

  • Wei Yang

    (Kelley School of Business, Indiana University, Bloomington, Indiana 47405)

  • Hayong Yun

    (Eli Broad College of Business, Michigan State University, East Lansing, Michigan 48824)

Abstract

We empirically examine the asset pricing implications of the Beckerian framework of household production, where utility is derived from both market consumption and home produced goods. We propose residential electricity usage as a real-time proxy for the service flow from household capital, because electricity is used in most modern-day household production activities and it cannot be easily stored. Using U.S. residential electricity usage from 1955 to 2012, our model based on household production explains the equity premium and the cross section of expected stock returns (including those of industry portfolios) with an R 2 of 71%. This paper was accepted by Jerome Detemple, finance.

Suggested Citation

  • Zhi Da & Wei Yang & Hayong Yun, 2016. "Household Production and Asset Prices," Management Science, INFORMS, vol. 62(2), pages 387-409, February.
    • Handle: RePEc:inm:ormnsc:v:62:y:2016:i:2:p:387-409
    DOI: 10.1287/mnsc.2014.2130
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