Consumption Risk and the Cross-Section of Expected Returns

48 Pages Posted: 3 Jan 2005

See all articles by Christian Julliard

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: March 2004

Abstract

This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (CCAPM) that an asset's expected return is determined by its equilibrium risk to consumption. Rather than measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth - as done in the previous literature on the CCAPM and the pattern of crosssectional returns - we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk explains little of the variation in observed average returns across the Fama and French 25 portfolios, ultimate consumption risk at a horizon of three years explains a large fraction of this variation.

Keywords: Consumption Capital Asset Pricing Model, Expected returns, Equity

JEL Classification: G12, G11, E21

Suggested Citation

Julliard, Christian and Parker, Jonathan A., Consumption Risk and the Cross-Section of Expected Returns (March 2004). Available at SSRN: https://ssrn.com/abstract=639044 or http://dx.doi.org/10.2139/ssrn.639044

Christian Julliard (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Jonathan A. Parker

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA
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National Bureau of Economic Research (NBER)

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