Seeing the Unobservable from the Invisible:The Role of CO2 in Measuring Consumption Risk
47 Pages Posted: 16 Aug 2012 Last revised: 19 Feb 2016
Date Written: April 15, 2015
Although it may be difficult for households to instantaneously adjust their stock of durable goods, they have much more latitude in adjusting the service flow from that stock. In contrast to past studies that assume service flow to be a constant fraction of the stock, we model the utilization of the stock of durable goods to be time-varying. We propose an innovative measure of the unobserved usage of durable goods from carbon dioxide emissions. Emissions provide a convenient aggregation of energy consumption that has become an important complementary input for durable goods consumption in recent decades. We find that the time-varying utilization of durable goods is a valid pricing factor. Our model exhibits a stronger cross-sectional pricing power than the CAPM and several consumption-based capital asset pricing models (CCAPMs), including Yogo's (2006) durable good model. Finally, our model mitigates the joint risk premium and implied risk-free rate puzzle.
Keywords: Consumption-Based Capital Asset Pricing Model (CCAPM), Durable Goods Service Flow, Carbon Dioxide Emissions
JEL Classification: G12, Q43
Suggested Citation: Suggested Citation