Abstract

http://ssrn.com/abstract=2337973
 
 

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Business-Cycle Consumption Risk and Asset Prices


Federico M. Bandi


University of Chicago - Booth School of Business

Andrea Tamoni


London School of Economics & Political Science (LSE)

June 8, 2016


Abstract:     
We show that a business-cycle consumption factor can explain the differences in risk premia across alternative portfolios, including recently-proposed anomalies portfolios. We argue that explicit allowance for a separation between consumption fluctuations with heterogeneous durations is important for interpreting cross-sectional pricing as well as the time-series dynamics of consumption and returns across horizons (i.e., the hump-shaped pricing ability of the covariance between ultimate consumption and returns, the hump-shaped structure of long-run risk premia, the decaying pattern in consumption growth predictability). Using a novel modeling approach relying on a frequency-based decomposition, we formalize the important role that aggregation can play in asset pricing.

Number of Pages in PDF File: 64

Keywords: C-CAPM, persistence heterogeneity in consumption, risk premia

JEL Classification: C22, C32, E32, E44, G12


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Date posted: October 10, 2013 ; Last revised: June 10, 2016

Suggested Citation

Bandi, Federico M. and Tamoni, Andrea, Business-Cycle Consumption Risk and Asset Prices (June 8, 2016). Available at SSRN: http://ssrn.com/abstract=2337973 or http://dx.doi.org/10.2139/ssrn.2337973

Contact Information

Federico Maria Bandi
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4352 (Phone)

Chicago Booth School of Business Logo

Andrea Tamoni (Contact Author)
London School of Economics & Political Science (LSE) ( email )
Houghton Street
London, WC2A 2AE
United Kingdom
02079557303 (Phone)
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