Short-Run and Long-Run Consumption Risks, Dividend Processes, and Asset Returns
58 Pages Posted: 24 May 2013 Last revised: 24 Aug 2016
Date Written: August 23, 2016
We examine the implications of short-run and long-run consumption risks on the momentum and long-term contrarian profits and the value premium in a unified economic framework. By introducing time-varying firm cash flow exposures to the short-run and long-run shocks in consumption growth, we find the otherwise standard intertemporal asset pricing model goes a long way toward generating the momentum and long-term contrarian profits and the value premium. The model also reproduces the size effect, the pairwise correlations between the profitabilities of these investment strategies, and the performance of the standard CAPM and the consumption CAPM in explaining these well-documented return behaviors.
Keywords: Short-run and long-run consumption risks, Momentum and long-term contrarian profits, Value premium
JEL Classification: G12, E44
Suggested Citation: Suggested Citation