Business-cycle consumption risk and asset prices

42 Pages Posted: 10 Oct 2013 Last revised: 22 Jul 2020

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

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

Bandi, Federico Maria and Tamoni, Andrea, Business-cycle consumption risk and asset prices (January 14, 2017). 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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