Durable consumption and asset returns: Cointegration analysis

Guojin Chen, Zhiwu Hong and Yu Ren ()

Economic Modelling, 2016, vol. 53, issue C, 231-244

Abstract: We incorporate durable consumption and cointegration specifications into a standard consumption asset pricing model, and use a Bayesian stochastic search approach to investigate both the cross-sectional variation in expected asset returns and the time variation in the equity premium at various investment horizons. Using U.S. data, we find that involving durable consumption into the cointegrating equation significantly improves the cross-section explanation of the consumption model. In addition, with the increase of the investment horizon, durable consumption accounts for more time variation of equity premium. Our empirical results indicate that the durable consumption risk should not be ignored in asset pricing.

Keywords: Durable consumption; Cointegration; Consumption asset pricing model; MCMC (search for similar items in EconPapers)
JEL-codes: C11 C22 G12 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:53:y:2016:i:c:p:231-244

DOI: 10.1016/j.econmod.2015.12.008

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