Asset pricing and energy consumption risk

Ashley Lim, Yihui Lan and Sirimon Treepongkaruna

Accounting and Finance, 2020, vol. 60, issue 4, 3813-3850

Abstract: This paper proposes energy consumption in the US as a new measure for the consumption capital asset pricing model. We find that (i) industrial energy growth produces reasonable values for the relative risk aversion coefficient and the implied risk‐free rate; (ii) compared to alternative consumption measures, industrial energy performs well in explaining the cross‐sectional variation in stock returns with the lowest implied risk aversion and pricing errors; (iii) the industrial energy consumption risk model performs equally well as the Fama–French three‐factor model in the cross‐sectional asset pricing tests; and (iv) total energy consumption risk is priced in the presence of the Fama–French factor risks.

Date: 2020
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