Parker, Jonathan A. and Julliard, Christian 
ORCID: 0000-0001-8177-7441
(2003)
Consumption risk and cross-sectional returns.
.
National Bureau of Economic Research, Cambridge, MA., USA.
Abstract
This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (C-CAPM) that an asset's expected return is determined by its equilibrium risk to consumption. Rather that measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth -- as done in the previous literature on the C-CAPM and the pattern of cross-sectional returns -- we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk has little predictive power for explaining the pattern of average returns across the Fama and French (25) portfolios, ultimate consumption risk is highly statistically significant in explaining average returns and explains a large fraction of the variation in average returns. Aditionally, estimates of the average risk-free real rate of interest and the coefficient of relative risk aversion of the representative household based on ultimate consumption risk are more reasonable than those obtained using contemporaneous consumption risk.
| Item Type: | Monograph (Working Paper) |
|---|---|
| Official URL: | http://www.nber.org |
| Additional Information: | © 2003 Jonathan A. Parker and Christian Julliard |
| Divisions: | Financial Markets Group Economics |
| Subjects: | H Social Sciences > HB Economic Theory |
| JEL classification: | G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice; Investment Decisions E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Employment, and Investment > E21 - Macroeconomics: Consumption; Saving; Aggregate Physical and Financial Consumer Wealth |
| Date Deposited: | 09 May 2008 16:22 |
| Last Modified: | 11 Dec 2024 18:36 |
| URI: | http://eprints.lse.ac.uk/id/eprint/4810 |
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