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Consumption Risk and the Cross-Section of Expected Returns

Author

Listed:
  • Jonathan A. Parker

    (Princeton University and NBER)

  • Christian Julliard

    (Princeton University)

Abstract

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.

Suggested Citation

  • Jonathan A. Parker & Christian Julliard, 2004. "Consumption Risk and the Cross-Section of Expected Returns," Working Papers 138, Princeton University, School of Public and International Affairs, Discussion Papers in Economics.
  • Handle: RePEc:pri:wwseco:dp229.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumption Capital Asset Pricing Model; Expected returns; Equity premium; Consumption risk; Consumption smoothing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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