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Consumption Risk and the Cross-Section of Expected Returns

Listed author(s):
  • Jonathan A. Parker

    (Princeton University and NBER)

  • Christian Julliard

    (Princeton University)

This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (CCAPM) that an asset?s expected return is determined by its equilibrium risk to consumption. Rather than measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth ? as done in the previous literature on the CCAPM and the pattern of crosssectional returns ? we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk explains little of the variation in observed average returns across the Fama and French 25 portfolios, ultimate consumption risk at a horizon of three years explains a large fraction of this variation.

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File URL: http://personal.lse.ac.uk/julliard/papers/CRCSER.pdf
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Paper provided by Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics in its series Working Papers with number 138.

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Date of creation: Mar 2004
Handle: RePEc:pri:wwseco:dp229.pdf
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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1997. " Assessing Specification Errors in Stochastic Discount Factor Models," Journal of Finance, American Finance Association, vol. 52(2), pages 557-590, June.
  2. Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2002. "Money, Interest Rates, and Exchange Rates with Endogenously Segmented Markets," Journal of Political Economy, University of Chicago Press, vol. 110(1), pages 73-112, February.
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