Pricing innovations in consumption growth: A re-evaluation of the recursive utility model

Yuchao Xiao, Robert Faff, Philip Gharghori and Byoung-Kyu Min

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4465-4475

Abstract: We re-evaluate the cross-sectional asset pricing implications of the recursive utility function of Epstein and Zin (1989, 1991), using innovations in future consumption growth in our tests. Our empirical specification helps explain the size, value and momentum effects. Specifically, we find that (і) the beta associated with news about consumption growth has a systematic pattern: beta decreases along the size dimension and increases along the book-to-market and momentum dimensions, (іі) innovation in consumption growth is significantly priced in asset returns using both the Fama and MacBeth (1973) and the stochastic discount factor approaches, and (ііі) the model performs better than both the CAPM and Fama–French model.

Keywords: Consumption based asset pricing model; Epstein and Zin’s recursive utility function; Economic tracking portfolio (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:11:p:4465-4475

DOI: 10.1016/j.jbankfin.2012.08.015

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