Consumption Fluctuations and Expected Returns

86 Pages Posted: 11 Jan 2018 Last revised: 8 Aug 2019

See all articles by Victoria Atanasov

Victoria Atanasov

University of Mannheim

Stig Vinther Møller

Aarhus University - CREATES

Richard Priestley

Norwegian Business School

Date Written: August 5, 2019

Abstract

This paper introduces a novel consumption-based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time-variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.

Keywords: consumption fluctuations, marginal utility, stock returns, predictability.

JEL Classification: G10, G12, G17

Suggested Citation

Atanasov, Victoria and Møller, Stig Vinther and Priestley, Richard, Consumption Fluctuations and Expected Returns (August 5, 2019). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3098057 or http://dx.doi.org/10.2139/ssrn.3098057

Victoria Atanasov

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Stig Vinther Møller

Aarhus University - CREATES ( email )

Nordre Ringgade 1
Aarhus, DK-8000
Denmark

Richard Priestley (Contact Author)

Norwegian Business School ( email )

Nydalsveien
37
N-0442 Oslo, 0283
Norway
47 46410515 (Phone)

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