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High-Order Consumption Moments and Asset Pricing

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  • Andrei Semenov

    (Department of Economics, York University)

Abstract

This paper develops an approximate equilibrium factor model for asset returns. In this model, the pricing factors are the cross-moments of return with the cross-sectional moments of individual consumption and the signs of the risk factor coefficients are driven by preference assumptions. Using household-level quarterly consumption data from the U.S. Consumer Expenditure Survey, we find that this model explains the observed equity premium with an economically realistic value of risk aversion when the stochastic discount factor is expressed in terms of the cross-sectional skewness and kurtosis, in addition to the mean and variance, of individual consumption.

Suggested Citation

  • Andrei Semenov, 2003. "High-Order Consumption Moments and Asset Pricing," Working Papers 2003_4, York University, Department of Economics, revised Jan 2005.
  • Handle: RePEc:yca:wpaper:2003_4
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    Cited by:

    1. Narayana Kocherlakota & Luigi Pistaferri, 2009. "Asset Pricing Implications of Pareto Optimality with Private Information," Journal of Political Economy, University of Chicago Press, vol. 117(3), pages 555-590, June.
    2. Andrei Semenov, 2004. "Asset Pricing with Idiosyncratic Consumption Risk and Limited Participation," Working Papers 2004_1, York University, Department of Economics.
    3. Narayana Kocherlakota & Luigi Pistaferri, 2008. "Household Heterogeneity and Asset Trade: Resolving the Equity Premium Puzzle in Three Countries," Levine's Bibliography 122247000000001886, UCLA Department of Economics.
    4. Basu, Parantap & Semenov, Andrei & Wada, Kenji, 2011. "Uninsurable risk and financial market puzzles," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 1055-1089, October.
    5. Andrei Semenov, 2003. "An Empirical Assessment of a Consumption CAPM with a Reference Level under Incomplete Consumption Insurance," Working Papers 2003_5, York University, Department of Economics.
    6. Balduzzi, Pierluigi & Yao, Tong, 2007. "Testing heterogeneous-agent models: an alternative aggregation approach," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 369-412, March.

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    More about this item

    Keywords

    asset pricing; equity premium; Euler equation; heterogeneous consumers; incomplete consumption insurance.;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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