Consumption Volatility Risk

40 Pages Posted: 11 Feb 2009 Last revised: 18 Oct 2012

Oliver Boguth

Arizona State University (ASU) - Finance Department

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business

Date Written: October 17, 2012

Abstract

We show that time-variation in macroeconomic uncertainty affects asset prices. Consumption volatility is a negatively priced source of risk for a wide variety of test assets. At the firm level, exposure to consumption volatility risk predicts future returns, generating a spread across quintile portfolios in excess of 7% annually. This premium is explained by cross-sectional differences in the sensitivity of dividend volatility to consumption volatility. Stocks with volatile cash flows in uncertain aggregate times require higher expected returns.

Keywords: Asset pricing, consumption volatility, cross section of returns, cash flow risk, recursive preferences.

JEL Classification: G12, G17, E44.

Suggested Citation

Boguth, Oliver and Kuehn, Lars-Alexander, Consumption Volatility Risk (October 17, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1336712 or http://dx.doi.org/10.2139/ssrn.1336712

Oliver Boguth

Arizona State University (ASU) - Finance Department ( email )

W. P. Carey School of Business
PO Box 873906
Tempe, AZ 85287-3906
United States

Lars-Alexander Kuehn (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

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