Consumption growth, preference for smoothing, changes in expectations and risk premium

Manuel J. Rocha Armada, Ricardo Sousa and Mark Wohar ()

The Quarterly Review of Economics and Finance, 2015, vol. 56, issue C, 80-97

Abstract: This paper derives a relationship between consumption growth, the consumption–wealth ratio and its first-difference, and asset returns. Using quarterly data for sixteen OECD countries, we find that the three-factor asset pricing model explains a large fraction of the variation in real stock returns. The model captures: (i) the concerns of agents with states of the world in which consumption growth is low; (ii) the preference of investors for a smooth consumption path as implied by the intertemporal budget constraint; and (ii) the role played by shifts in expectations about future returns due to positive or negative news about their wealth.

Keywords: Consumption growth; Intertemporal budget constraint; Consumption–wealth ratio; Expected returns; Asset pricing (search for similar items in EconPapers)
JEL-codes: E21 E24 G12 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:56:y:2015:i:c:p:80-97

DOI: 10.1016/j.qref.2014.09.005

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