Business-cycle consumption risk and asset prices

61 Pages Posted: 10 Oct 2013 Last revised: 17 Apr 2023

See all articles by Federico M. Bandi

Federico M. Bandi

Johns Hopkins University - Carey Business School

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: January 14, 2017

Abstract

Aggregation is routinely employed in asset pricing to capture frequency-specific effects. We formalize the theoretical mapping between aggregates of time series and their frequency-specific components as well as the mapping between factor loadings obtained upon aggregation of returns and factors and frequency-specific factor loadings. We show that business-cycle consumption, a component of the consumption growth process with cycles between 4 and 8 years, provides valuable pricing signal. In agreement with the implications of theory, we document that consumption growth aggregated over a 4-year horizon (4-year consumption) has analogous pricing ability, cross-sectionally and in the time series, to business-cycle consumption.

Keywords: C-CAPM, business-cycle consumption, aggregation

JEL Classification: C22, C32, E32, E44, G12

Suggested Citation

Bandi, Federico Maria and Tamoni, Andrea, Business-cycle consumption risk and asset prices (January 14, 2017). Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2337973 or http://dx.doi.org/10.2139/ssrn.2337973

Federico Maria Bandi

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Andrea Tamoni (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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