Business-Cycle Consumption Risk and Asset Prices
Federico M. Bandi
University of Chicago - Booth School of Business
London School of Economics & Political Science (LSE)
June 8, 2016
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
Date posted: October 10, 2013 ; Last revised: June 10, 2016
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