Lazy Investors, Discretionary Consumption, and the Cross Section of Stock Returns
Hong Kong Polytechnic University - School of Accounting and Finance
Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad
December 8, 2005
AFA 2006 Boston Meetings Paper
When consumption betas of stocks are computed using consumption growth from 4th quarter of one year to the next, the CCAPM explains the cross section of stock returns as well as the Fama and French (1993) three factor model. The CCAPM performance deteriorates substantially when consumption growth is measured over other quarters. For the CCAPM to hold at any given point in time, investors must be making their consumption and investment decisions simultaneously at that point in time. We suspect that it is more likely to happen during the fourth quarter given the ending of the tax year in December.
Number of Pages in PDF File: 80
Keywords: CCAPM, Cost of Capital, Capital Asset Pricing Model, Consumption Risk, Systematic Risk, Infrequent Decisions
JEL Classification: G12
Date posted: January 4, 2005
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