Cross-sectional consumption-based asset pricing: The importance of consumption timing and the inclusion of severe crises

Tom Engsted and Stig Møller ()
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Stig Møller: Finance Research Group, Aarhus School of Business, Aarhus University and CREATES, Postal: Fuglesangs allé 4, DK-8210 Aarhus V., Denmark

CREATES Research Papers from Department of Economics and Business Economics, Aarhus University

Abstract: By using a beginning-of-period timing convention for consumption, and by including the Great Depression years in the analysis, we show that on annual data from 1926 to 2009 a standard contemporaneous consumption risk model goes a long way in explaining the size and value premiums in cross-sectional data that include both the Fama-French portfolios and industry portfolios. A long run consumption risk variant of the model also produces a high cross-sectional fit. In addition, the equity premium puzzle is significantly reduced in the models. We argue that in evaluating consumption based models, it is important to include both boom and crises periods, i.e. periods with severe consumption declines as well as periods with strong growth, and that the standard post-war data sample may not be well suited in this respect.

Keywords: Consumption-based model; long-run risk; the Great Depression; beginning-of-period timing convention; equity premium puzzle; Fama-French and industry portfolios; size and value premiums; GMM; cross-sectional R2. (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Pages: 29
Date: 2011-02-03
New Economics Papers: this item is included in nep-cis and nep-dge
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Citations: View citations in EconPapers (3)

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