Firm characteristics, consumption risk, and firm-level risk exposures

Robert F. Dittmar and Christian T. Lundblad

Journal of Financial Economics, 2017, vol. 125, issue 2, 326-343

Abstract: We propose a novel approach to measuring firm-level risk exposures and costs of equity. Using a simple consumption-based asset pricing model that explains nearly two-thirds of the variation in average returns across 55 anomaly portfolios, we map the relation between exposures to consumption risk and portfolio-level characteristics. We use this relation to calculate exposures to consumption risk at the firm level and show that the calculated consumption risk exposures yield portfolios with large differences in average returns and ex post consumption risk exposures consistent with those predicted by our calculated betas. Further, industry betas and risk premia implied by our procedure display economically intuitive variation over time. Finally, Fama-MacBeth regressions suggest that risk exposures calculated using our procedure dominate those from alternative factor models at explaining cross-sectional variation in returns.

Keywords: Consumption-based asset pricing; Anomalies; Firm-level cost of capital (search for similar items in EconPapers)
JEL-codes: C58 G11 G12 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:125:y:2017:i:2:p:326-343

DOI: 10.1016/j.jfineco.2017.05.002

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