Consumption Risk Over the Frequency Domain

Kalyvitis, Sarantis C.; Panopoulou, Ekaterini

doi:10.2139/ssrn.967242

Consumption Risk Over the Frequency Domain

40 Pages Posted: 1 Mar 2007 Last revised: 22 Aug 2008

See all articles by Sarantis C. Kalyvitis

Sarantis C. Kalyvitis

Athens University of Economics and Business - Department of International and European Economic Studies

Ekaterini Panopoulou

Essex Business School

Date Written: February 2007

Abstract

In this paper we extend the concept of ultimate consumption risk analyzed by Parker and Julliard (Journal of Political Economy, 2005), and we evaluate the Consumption Capital Asset Pricing Model by employing as an explanatory variable consumption risk over the frequency domain. We find that at lower frequencies consumption risk explains up to 98% of the cross-sectional variation of expected returns and the equity premium puzzle is resolved. Our evidence is consistent with a coefficient of risk aversion between 1 and 4 in the very long run.

Keywords: C-CAPM, consumption risk, frequency domain, equity premium, risk aversion

JEL Classification: G11, G12, C13

Suggested Citation: Suggested Citation

Kalyvitis, Sarantis C. and Panopoulou, Ekaterini, Consumption Risk Over the Frequency Domain (February 2007). Available at SSRN: https://ssrn.com/abstract=967242 or http://dx.doi.org/10.2139/ssrn.967242