Long-Horizon Consumption Risk and the Cross-Section of Returns: New Tests and International Evidence

36 Pages Posted: 23 Oct 2008 Last revised: 26 Oct 2009

See all articles by Joachim Grammig

Joachim Grammig

University of Tübingen

Andreas Schrimpf

CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department

Michael Schuppli

University of Münster

Date Written: October 10, 2008

Abstract

This paper investigates whether measuring consumption risk over long horizons can improve the empirical performance of the Consumption CAPM for size and value premia in international stock markets (US, UK, and Germany). We modify the estimation approach of Parker and Julliard (2005) taking commonalities in size and book-to-market sorted portfolios into account. Our results show that, contrary to the findings of Parker and Julliard, the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. At the same time, however, measuring consumption risk over longer horizons typically yields lower risk-aversion estimates. Thus, our results suggest that more plausible parameter estimates - as opposed to lower pricing errors - can be regarded as the main achievement of the long-horizon Consumption CAPM.

Keywords: Consumption-based Asset Pricing, Long-Run Consumption Risk, Value Puzzle, International Stock Markets

Suggested Citation

Grammig, Joachim and Schrimpf, Andreas and Schrimpf, Andreas and Schuppli, Michael, Long-Horizon Consumption Risk and the Cross-Section of Returns: New Tests and International Evidence (October 10, 2008). Paris December 2008 Finance International Meeting Paper, Available at SSRN: https://ssrn.com/abstract=1282100 or http://dx.doi.org/10.2139/ssrn.1282100

Joachim Grammig

University of Tübingen ( email )

Mohlstrasse 36
72074 Tübingen, Baden Wuerttemberg 72074
Germany

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Michael Schuppli (Contact Author)

University of Münster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

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