Learning about the Consumption Risk Exposure of Firms

59 Pages Posted: 4 Aug 2021 Last revised: 19 May 2022

See all articles by Yongjin Kim

Yongjin Kim

City University of Hong Kong

Lars-Alexander Kuehn

Carnegie Mellon University - David A. Tepper School of Business

Kai Li

Peking University HSBC Business School

Date Written: August 1, 2021

Abstract

We structurally estimate an investment-based asset pricing model, in which firms' exposure to macroeconomic risk is unknown. Bayesian beliefs about this parameter are updated from firms' and industry peers' comovement between their productivity and consumption growth. The model implies that discount rates rise endogenously with the perceived risk exposure of firms, thereby depressing investment and valuation ratios. We test these predictions in the data and find strong support for them. We also confirm that cross-sectional learning from peers is crucial, and that alternative Bayesian risk estimates, which ignore peer observations, do not predict firm variables.

Keywords: Parameter uncertainty, Bayesian learning, Systematic consumption risk, Investment-based asset pricing, SMM

JEL Classification: E2, E3, G12

Suggested Citation

Kim, Yongjin and Kuehn, Lars-Alexander and Li, Kai, Learning about the Consumption Risk Exposure of Firms (August 1, 2021). Available at SSRN: https://ssrn.com/abstract=3897353 or http://dx.doi.org/10.2139/ssrn.3897353

Yongjin Kim

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon Tong
Hong Kong

Lars-Alexander Kuehn (Contact Author)

Carnegie Mellon University - David A. Tepper School of Business ( email )

5000 Forbes Avenue
Pittsburgh, PA 15213-3890
United States

Kai Li

Peking University HSBC Business School ( email )

+86 755 26032023 (Phone)

HOME PAGE: http://sites.google.com/site/kailiwebpage

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