Firm Characteristics, Consumption Risk, and Firm-Level Risk Exposures

51 Pages Posted: 31 Oct 2013 Last revised: 1 Dec 2015

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School

Date Written: November 30, 2015

Abstract

We propose a novel approach to measuring firm-level risk exposures and costs of equity. Using a simple consumption-based asset pricing model that explains nearly two-thirds of the variation in average returns across 55 portfolios, we map the relation between exposures to consumption risk and portfolio-level characteristics. We use this relation to calculate exposures to consumption risk at the firm level and show that the calculated consumption risk exposures yield portfolios with large differences in average returns and ex post consumption risk exposures consistent with those predicted by our calculated betas. Further, industry betas and risk premia implied by our procedure display economically intuitive variation over time. Finally, Fama-MacBeth regressions suggest that risk exposures calculated using our procedure dominate those from alternative factor models at explaining cross-sectional variation in returns.

Keywords: Asset Pricing, Consumption Modeling, Cross-Section of Returns

JEL Classification: G12, E44

Suggested Citation

Dittmar, Robert F. and Lundblad, Christian T., Firm Characteristics, Consumption Risk, and Firm-Level Risk Exposures (November 30, 2015). Available at SSRN: https://ssrn.com/abstract=2347493 or http://dx.doi.org/10.2139/ssrn.2347493

Robert F. Dittmar (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Christian T. Lundblad

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-8441 (Phone)

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