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)

May 9, 2015


Abstract:     
We show that a business-cycle consumption factor can explain satisfactorily the differences in risk premia across book-to-market and size-sorted portfolios. We argue that explicit allowance for 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, we justify results on aggregation in the asset pricing literature.

Number of Pages in PDF File: 57

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: May 9, 2015

Suggested Citation

Bandi, Federico M. and Tamoni, Andrea, Business-Cycle Consumption Risk and Asset Prices (May 9, 2015). 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)
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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