Long-Run Stockholder Consumption Risk and Asset Returns
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)
Christopher J. Malloy
Harvard Business School; National Bureau of Economic Research (NBER)
Tobias J. Moskowitz
University of Chicago - Booth School of Business; AQR Capital; National Bureau of Economic Research (NBER)
January 30, 2008
Harvard Business School Finance Working Paper No. 08-060
We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by stockholders. Exploiting micro-level household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or non-stockholder consumption risk, and provides more plausible economic magnitudes. We find that risk aversion estimates around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French size and value portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks.
Number of Pages in PDF File: 71
JEL Classification: G12, E21
Date posted: February 1, 2008
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