Non-substitutable consumption growth risk

58 Pages Posted: 30 Nov 2018 Last revised: 24 Feb 2022

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Christian Schlag

Goethe University Frankfurt; 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 assume 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 nondurables. As a consequence, energy consumption affects the pricing function as a separate factor. Variation in energy consumption betas explains a large part of the premia related to value, investment, and operating profitability. For example, 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

Goethe University Frankfurt ( email )

Faculty of Economics and Business
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, Hessen 60323
Germany

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://www.julianthimme.de

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