Surplus Consumption Ratio and Expected Stock Returns

I. Ghattassi

Working papers from Banque de France

Abstract: Based on CAMPBELL and COCHRANE [1999] Consumption-Based Asset Pricing Model (C)CAPM with habit formation, this paper provides empirical evidence in favor of the importance of habit persistence in asset pricing. Using U.S data, we show that the surplus consumption ratio is a strong predictor of excess returns at long-horizons and that it captures a component of expected returns, not explained by the consumption-wealth ratio. Moreover, this paper shows that the (C)CAPM with habit formation performs far better than the standard (C)CAPM in accounting for the cross-sectional variations in average excess returns on the 25 FAMA-FRENCH portfolios sorted by size and book-to-market value.

Keywords: Habit formation; Surplus consumption ratio; Expected returns; Time series predictability; Cross section returns. (search for similar items in EconPapers)
JEL-codes: E21 G21 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2013
New Economics Papers: this item is included in nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:banfra:417

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