Consumption Risk and the Cross-Section of Expected Returns
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.
|Date of creation:||Mar 2004|
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- 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.
- Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
- Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing Specification Errors in Stochastic Discount Factor Models," NBER Technical Working Papers 0153, National Bureau of Economic Research, Inc.
- 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.
- Fernando Alvarez & Andrew Atkeson & Patrick J. Kehoe, 2000. "Money, interest rates, and exchange rates with endogenously segmented markets," Staff Report 278, Federal Reserve Bank of Minneapolis.
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