Business-cycle consumption risk and asset prices
42 Pages Posted: 10 Oct 2013 Last revised: 22 Jul 2020
Date Written: January 14, 2017
We show that a business-cycle component of consumption growth (dubbed business-cycle consumption) with cycles between 2 and 4 years is effective in explaining the differences in risk premia across alternative test assets, including recently-proposed anomaly portfolios. We formalize the mapping between component-wise factor loadings and factor loadings obtained upon aggregation of returns and consumption growth over suitable horizons. Consistent with our formalization, we show that the factor loadings associated with consumption growth aggregated over a 2-year horizon have similar pricing ability as those associated with business-cycle consumption.
Keywords: C-CAPM, business-cycle consumption, aggregation
JEL Classification: C22, C32, E32, E44, G12
Suggested Citation: Suggested Citation