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Scale-Specific Risk in the Consumption CAPM

Federico M. Bandi

University of Chicago - Booth School of Business

Andrea Tamoni

London School of Economics & Political Science (LSE)

December 31, 2013

While contemporaneous consumption growth is known not to price the cross section of stock returns, we find that suitable sub-components (or details) of consumption growth with periodicities corresponding to the business cycle do. Specifically, we disaggregate consumption growth into details with different levels of persistence and show that those corresponding to business-cycle scales can explain 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 risk compensations in financial markets but also for capturing the joint 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 our proposed scale-based data generating process for consumption growth, we discuss implications for the cross-sectional pricing literature relying on aggregation.

Number of Pages in PDF File: 49

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: January 30, 2014

Suggested Citation

Bandi, Federico M. and Tamoni, Andrea, Scale-Specific Risk in the Consumption CAPM (December 31, 2013). 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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