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)

September 30, 2014


Abstract:     
We disaggregate consumption growth into components with different levels of persistence and show that a single business-cycle consumption factor can explain satisfactorily the differences in risk premia across book-to-market and size-sorted portfolios. We argue that accounting for persistence heterogeneity in consumption is important for interpreting cross-sectional risk compensations in financial markets but also for capturing the joint time-series dynamics of consumption and returns across horizons (for instance, the hump-shaped pricing ability of the covariance between "ultimate consumption" and returns, the hump-shaped structure of long-run risk premia as well as the decaying pattern in consumption growth predictability). Using a novel time/frequency-based data generating process for consumption growth and asset returns, we discuss implications for the asset pricing literature relying on aggregation.

Number of Pages in PDF File: 50

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: October 3, 2014

Suggested Citation

Bandi, Federico M. and Tamoni, Andrea, Business-Cycle Consumption Risk and Asset Prices (September 30, 2014). 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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