Lazy Investors, Discretionary Consumption, and the Cross Section of Stock Returns

80 Pages Posted: 4 Jan 2005  

Yong Wang

Hong Kong Polytechnic University - School of Accounting and Finance

Ravi Jagannathan

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER); Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); Indian School of Business (ISB), Hyderabad

Multiple version iconThere are 3 versions of this paper

Date Written: December 8, 2005

Abstract

When consumption betas of stocks are computed using consumption growth from 4th quarter of one year to the next, the CCAPM explains the cross section of stock returns as well as the Fama and French (1993) three factor model. The CCAPM performance deteriorates substantially when consumption growth is measured over other quarters. For the CCAPM to hold at any given point in time, investors must be making their consumption and investment decisions simultaneously at that point in time. We suspect that it is more likely to happen during the fourth quarter given the ending of the tax year in December.

Keywords: CCAPM, Cost of Capital, Capital Asset Pricing Model, Consumption Risk, Systematic Risk, Infrequent Decisions

JEL Classification: G12

Suggested Citation

Wang, Yong and Jagannathan, Ravi, Lazy Investors, Discretionary Consumption, and the Cross Section of Stock Returns (December 8, 2005). AFA 2006 Boston Meetings Paper. Available at SSRN: https://ssrn.com/abstract=641682 or http://dx.doi.org/10.2139/ssrn.641682

Yong Wang

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom, Kowloon
Hong Kong
Hong Kong

Ravi Jagannathan (Contact Author)

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
429 Andersen Hall
Evanston, IL 60208
United States
847-491-8338 (Phone)
847-491-5719 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

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