Business-cycle consumption risk and asset prices

Federico M. Bandi and Andrea Tamoni

Journal of Econometrics, 2023, vol. 237, issue 2

Abstract: Aggregation is routinely employed in asset pricing to capture frequency-specific effects. We formalize the theoretical mapping between aggregates of time series and their frequency-specific components as well as the mapping between factor loadings obtained upon aggregation of returns and factors and frequency-specific factor loadings. We show that business-cycle consumption, a component of the consumption growth process with cycles between 4 and 8 years, provides valuable pricing signal. In agreement with the implications of theory, we document that consumption growth aggregated over a 4-year horizon (4-year consumption) has analogous pricing ability, cross-sectionally and in the time series, to business-cycle consumption.

Keywords: CCAPM; Business-cycle consumption; Frequency; Aggregation; Return predictability (search for similar items in EconPapers)
JEL-codes: C22 C32 E32 E44 G12 (search for similar items in EconPapers)
Date: 2023
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:econom:v:237:y:2023:i:2:s0304407623001410

DOI: 10.1016/j.jeconom.2022.11.012

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