Cross-Sectional Evidence in Consumption Mismeasurement
34 Pages Posted: 30 Aug 2013
Date Written: August 28, 2013
Filtered consumption growths, constructed from a broad set of macro variables, improve cross-sectional asset pricing on portfolios formed on size, book-to-market equity, and past performance compared to observed consumption growth. I use two methods to construct measures of filtered consumption growth, both of which produce higher cross-sectional R-squareds and lower pricing errors relative to observed consumption growth. Macro variables measuring quantities matter more than macro variables measuring prices in constructing filtered growth.
Keywords: consumption, asset pricing, dimension reduction, cross section
JEL Classification: G12, C33
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