Cointegration and Consumption Risks in Asset Returns

Ravi Bansal, Robert Dittmar () and Dana Kiku

The Review of Financial Studies, 2009, vol. 22, issue 3, 1343-1375

Abstract: We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long-run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the cross-sectional variation in equity returns at both short and long horizons; however, this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long-run consumption risks for financial markets. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org., Oxford University Press.

Date: 2009
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Journal Article: Cointegration and Consumption Risks in Asset Returns (2009)
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