Asset Pricing without Garbage

63 Pages Posted: 17 Sep 2013 Last revised: 19 Jul 2016

Date Written: February 10, 2016


This paper provides an explanation for why garbage implies a much lower relative risk aversion in the consumption-based asset pricing model than National Income and Product Accounts (NIPA) consumption expenditure: unlike garbage, NIPA consumption is filtered to mitigate measurement error. I apply a simple model of the filtering process that allows one to undo the filtering inherent in NIPA consumption. “Unfiltered NIPA consumption” well explains the equity premium and is priced in the cross-section of stock returns. I discuss the likely properties of true consumption (i.e., without measurement error and filtering) and quantify implications for habit and long-run risk models.

The appendices for this paper are available at the following URL:

Keywords: consumption-based asset pricing, equity premium, relative risk aversion, cross-section of stock returns, consumption volatility, filtering

JEL Classification: G12

Suggested Citation

Kroencke, Tim Alexander, Asset Pricing without Garbage (February 10, 2016). Journal of Finance, Forthcoming, Available at SSRN: or

Tim Alexander Kroencke (Contact Author)

FHNW School of Business ( email )

Peter Merian-Strasse 86
Basel, 4002

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