Fuel is Pumping Premiums: A Consumption-Based Explanation of the Value Anomaly

60 Pages Posted: 30 Nov 2018 Last revised: 1 Oct 2019

See all articles by Robert F. Dittmar

Robert F. Dittmar

University of Michigan, Stephen M. Ross School of Business

Christian Schlag

Goethe University Frankfurt - Research Center SAFE

Julian Thimme

Karlsruhe Institute of Technology

Date Written: November 19, 2018

Abstract

The standard approach in empirical consumption-based asset pricing to use nondurables and services as a proxy for consumption appears inappropriate. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute gasoline consumption by consumption of other nondurable goods or services. As a consequence, gasoline consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in gasoline 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 gasoline 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, Fuel is Pumping Premiums: A Consumption-Based Explanation of the Value Anomaly (November 19, 2018). 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 - Research Center 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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