Consumption Volatility Risk
Arizona State University (ASU) - Finance Department
Carnegie Mellon University - David A. Tepper School of Business
October 17, 2012
Journal of Finance, Forthcoming
We show that time-variation in macroeconomic uncertainty affects asset prices. Consumption volatility is a negatively priced source of risk for a wide variety of test assets. At the firm level, exposure to consumption volatility risk predicts future returns, generating a spread across quintile portfolios in excess of 7% annually. This premium is explained by cross-sectional differences in the sensitivity of dividend volatility to consumption volatility. Stocks with volatile cash flows in uncertain aggregate times require higher expected returns.
Number of Pages in PDF File: 40
Keywords: Asset pricing, consumption volatility, cross section of returns, cash flow risk, recursive preferences.
JEL Classification: G12, G17, E44.Accepted Paper Series
Date posted: February 11, 2009 ; Last revised: October 18, 2012
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