Business-cycle consumption risk and asset prices
61 Pages Posted: 10 Oct 2013 Last revised: 17 Apr 2023
Date Written: January 14, 2017
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: Suggested Citation