Consumption Heterogeneity and Long Run Risk

25 Pages Posted: 15 Feb 2008

See all articles by Victoria Galsband

Victoria Galsband

University of Zurich - Institute for Empirical Research in Economics

Mathias Hoffmann

University of Zurich - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 10, 2008

Abstract

This paper establishes a surprising and robust empirical similarity between short-run heterogeneous consumption and long-term consumption growth risk models. The models not only deliver a similar fit on a given set of portfolios, their actual pricing errors are also highly correlated. In addition, we find that consumption dispersion is a robust predictor of the transitory component in aggregate consumption growth. To interpret these findings, we propose a model in which aggregate uncertainty is a function of idiosyncratic uncertainty and only long-term consumption growth risk is priced. An implication of this being that consumption dispersion is priced empirically not because markets are necessarily incomplete but because investors disagree in the short-run about their common long-term consumption prospects.

Keywords: consumption CAPM, idiosyncratic risk, consumption dispersion

JEL Classification: E21, F30, G15

Suggested Citation

Galsband, Victoria and Hoffmann, Mathias, Consumption Heterogeneity and Long Run Risk (February 10, 2008). Available at SSRN: https://ssrn.com/abstract=1093613 or http://dx.doi.org/10.2139/ssrn.1093613

Victoria Galsband (Contact Author)

University of Zurich - Institute for Empirical Research in Economics ( email )

Switzerland
0041446345261 (Phone)

Mathias Hoffmann

University of Zurich - Department of Economics ( email )

Zuerich, 8006
Switzerland

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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