Cointegration and Consumption Risks in Asset Returns

Posted: 17 Mar 2009

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Dana Kiku

University of Illinois at Urbana-Champaign

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long-run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the cross-sectional variation in equity returns at both short and long horizons; however, this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long-run consumption risks for financial markets.

Keywords: G1, G12

Suggested Citation

Bansal, Ravi and Dittmar, Robert F. and Kiku, Dana, Cointegration and Consumption Risks in Asset Returns (March 2009). The Review of Financial Studies, Vol. 22, Issue 3, pp. 1343-1375, 2009, Available at SSRN: https://ssrn.com/abstract=1359519 or http://dx.doi.org/hhm085

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

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Durham, NC 27708-0120
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Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Dana Kiku

University of Illinois at Urbana-Champaign ( email )

601 E John St
Champaign, IL 61820
United States

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