Portfolio Returns and Consumption Growth Covariation in the Frequency Domain, Real Economic Activity, and Expected Returns
69 Pages Posted: 15 Feb 2018 Last revised: 18 Sep 2019
Date Written: September 16, 2019
The slope of the portfolio return and consumption growth cospectrum contains predictive information about future real economic activity, future recession probabilities, the risk aversion coefficient, as well as future expected returns. Commonly used economic variables do not subsume the predictive power of the cospectrum slope and while the interest rate term spread largely fails to predict the Financial Crisis, the set of cospectrum slopes predicts the crisis with a 75% probability. The cospectrum slope significantly improves the fit of long-horizon expected return models and contains more significant predictive information than the current dividend yield.
Keywords: Asset pricing, Frequency domain, Real economic activity, Risk premium
JEL Classification: G10, G11, G12
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