Consumption Volatility and the Cross-Section of Stock Returns

Review of Finance, Forthcoming

42 Pages Posted: 3 May 2007 Last revised: 11 Dec 2013

Date Written: November 2013


I derive and test multi-horizon implications of a consumption-based equilibrium model featuring fluctuating expected growth and volatility. My setup allows consumption dynamics to be estimated jointly with covariance risk prices in a single-stage GMM, and then inferences from asset pricing tests reflect uncertainty coming from factor estimation. I show that changes in consumption volatility are the key driver for explaining major asset pricing anomalies across risk horizons, while other factors play no or a secondary role. Value stocks and past long-term losers pay higher average returns mainly because they covary more negatively with these changes than what other stocks do.

Keywords: Level Risk, Expected Growth Risk, Consumption Volatility Risk, GARCH, Kalman Filter

JEL Classification: G1, G12, G11, C1, C5

Suggested Citation

Tédongap, Roméo, Consumption Volatility and the Cross-Section of Stock Returns (November 2013). Review of Finance, Forthcoming, Available at SSRN: or

Roméo Tédongap (Contact Author)

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
+33134439734 (Phone)
+33134439734 (Fax)

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