Consumption in asset returns

Bryzgalova, Svetlana, Huang, Jiantao and Julliard, Christian ORCID: 0000-0001-8177-7441 (2024) Consumption in asset returns. Journal of Finance. ISSN 0022-1082 (In Press)

Text (ssrn-3783070 (1)) - Accepted Version Download (5MB)

Abstract

Using information in returns we identify the stochastic process of consumption. We find that aggregate consumption reacts over multiple quarters to innovations spanned by financial markets, and this persistent component accounts for over a quarter of consumption variation. These shocks are cross-sectionally priced, drive most of the time series variation in stocks, and a small, yet significant, share of volatility of bonds. Nevertheless, we find no support for stochastic volatility of consumption driving timevarying risk premia. Finally, an otherwise standard recursive utility model based on our estimated process explains both equity premium and risk-free rate puzzles with low risk aversion.

Item Type:	Article
Additional Information:	© 2024
Divisions:	Finance
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E27 - Forecasting and Simulation G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Determination of Interest Rates; Term Structure of Interest Rates C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C11 - Bayesian Analysis
Date Deposited:	22 Nov 2024 14:42
Last Modified:	12 Dec 2024 04:35
URI:	http://eprints.lse.ac.uk/id/eprint/126152

Actions (login required)

View Item