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

79 Pages Posted: 14 Aug 2006

See all articles by Yong Wang

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

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Abstract

When consumption betas of stocks are computed using year-over-year consumption growth based upon the fourth quarter, the CCAPM explains the cross-section of stock returns as well as the Fama and French (1993) three-factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends 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. AFA 2006 Boston Meetings Paper; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=923938

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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