Non-substitutable consumption growth risk

52 Pages Posted: 30 Nov 2018 Last revised: 3 Jun 2020

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Christian Schlag

Leibniz Institute for Financial Research SAFE

Julian Thimme

Karlsruhe Institute of Technology

Date Written: February 24, 2020

Abstract

Standard applications of the consumption-based asset pricing model make the assumption that goods and services within the nondurable consumption bundle are substitutes. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute energy consumption by consumption of other nondurable goods or services. As a consequence, energy consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in energy consumption betas explains a large part of the value premium. Value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the oil supply shocks that also affect households.

Keywords: asset pricing, consumption, cross-section of stock returns, utility functions

JEL Classification: G12, E44, D81

Suggested Citation

Dittmar, Robert F. and Schlag, Christian and Thimme, Julian, Non-substitutable consumption growth risk (February 24, 2020). Available at SSRN: https://ssrn.com/abstract=3289249 or http://dx.doi.org/10.2139/ssrn.3289249

Robert F. Dittmar

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

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Christian Schlag

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany
+49 69 798 33699 (Phone)

Julian Thimme (Contact Author)

Karlsruhe Institute of Technology ( email )

Kaiserstra├če 12
Karlsruhe, Baden W├╝rttemberg 76131
Germany

HOME PAGE: http://julianthimme.de

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