Consumption, Dividends, and the Cross-Section of Equity Returns

46 Pages Posted: 26 Sep 2001

See all articles by Ravi Bansal

Ravi Bansal

Duke University and NBER

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: May 2002

Abstract

A central economic idea is that an asset's risk premium is determined by its ability to insure against fluctuations in consumption (i.e., by the consumption beta). Cross-sectional differences in consumption betas mirror differences in the exposure of the asset's dividends to aggregate consumption, an implication of many general equilibrium models. Hence, cross-sectional differences in the exposure of dividends to consumption may provide valuable information regarding the cross-sectional dispersion in risk premia. We measure the exposure of dividends to consumption (labeled as consumption leverage) by the covariance of ex-post dividend growth rates with the expected consumption growth rate, and alternatively by relying on stochastic cointegration between dividends and consumption. Cross-sectional differences in this consumption leverage parameter can explain about 50% of the variation in risk premia across 30 portfolios - which include 10 momentum, 10 size, and 10 book-to-market sorted portfolios. The consumption leverage model can justify much of the observed value, momentum, and size risk premium spreads. For this asset menu, alternative models proposed in the literature (including time varying beta models) have considerable difficulty in justifying the cross-sectional dispersion in the risk premia. Our measures of consumption leverage are driven by the exposure of dividend growth rates to low frequency movements in consumption growth. We document that it is this exposure that contains valuable information regarding the cross-sectional differences in risk premia across assets.

Keywords: Asset Pricing Theory, Asset Pricing - Empirical, Asset Pricing - Equilibrium Models

JEL Classification: G0, G1, C5, E2

Suggested Citation

Bansal, Ravi and Dittmar, Robert F. and Lundblad, Christian T., Consumption, Dividends, and the Cross-Section of Equity Returns (May 2002). Twelfth Annual Utah Winter Finance Conference. Available at SSRN: https://ssrn.com/abstract=284208 or http://dx.doi.org/10.2139/ssrn.284208

Ravi Bansal (Contact Author)

Duke University and NBER ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7758 (Phone)
919-660-8038 (Fax)

Robert F. Dittmar

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)

Register to save articles to
your library

Register

Paper statistics

Downloads
479
Abstract Views
2,584
rank
58,491
PlumX Metrics