Long-horizon consumption risk and the cross-section of returns: new tests and international evidence

Joachim Grammig (), Andreas Schrimpf and Michael Schuppli

European Journal of Finance, 2009, vol. 15, issue 5-6, pages 511-532

Abstract: This paper investigates whether measuring consumption risk over long horizons can improve the empirical performance of the consumption-based capital asset pricing model (CCAPM) for size and value premia in international stock markets (USA, UK, and Germany). In order to account for commonalities in size and book-to-market sorted portfolios, we also include industry portfolios in our set of test assets. Our results show that, contrary to the findings of Parker and Julliard [2005. Consumption risk and the cross- section of expected returns. Journal of Political Economy 113, no. 1: 185-222], the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. At the same time, however, measuring consumption risk over longer horizons typically yields lower risk-aversion estimates. Thus, our results suggest that more plausible parameter estimates - as opposed to lower pricing errors - can be regarded as the main achievement of the long-horizon CCAPM.

Keywords: consumption-based asset pricing; long-run consumption risk; value puzzle; international stock markets (search for similar items in EconPapers)
Date: 2009

Downloads: (external link)
http://www.informaworld.com/openurl?genre=article& ... 40C6AD35DC6213A474B5 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:taf:eurjfi:v:15:y:2009:i:5-6:p:511-532

Ordering information: This journal article can be ordered from
http://www.tandf.co.uk/journals/subscription.html

Access Statistics for this article

European Journal of Finance is edited by Chris Adcock

More articles in European Journal of Finance from Taylor and Francis Journals
Series data maintained by Christopher F. Baum ().