Asset pricing with two types of heterogeneous consumption volatilities in mind: Evidence from China

Qi-An Chen, Huashi Li, Jianyi Lin and Youliang Yan

Pacific-Basin Finance Journal, 2023, vol. 77, issue C

Abstract: Recent studies have highlighted asymmetric asset pricing in different economic states. We divide China's aggregate consumption into two specific sets and determine two heterogeneous consumption volatilities. One positively mirrors the state of good times, and the other positively maps the state of bad times. We then propose a consumption-based asset pricing model that is associated with economic times, in which two pricing factors related to the two consumption volatilities play antagonistic roles. Theoretical and empirical analyses based on the model indicate that equity premiums are low during good times but high during bad times. Specifically, equity premiums are more susceptible to bad times. Moreover, the model plausibly accounts for variations in cross-sectional patterns and outperforms three- and five-factor models (Fama and French, 1993, 2015) at the stock portfolio level owing to its relatively minimal pricing error.

Keywords: Consumption; Heterogeneous volatilities; Asset pricing; Stock market (search for similar items in EconPapers)
JEL-codes: D11 D14 G11 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:77:y:2023:i:c:s0927538x22001858

DOI: 10.1016/j.pacfin.2022.101890

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