Consumption in asset returns

Svetlana Bryzgalova, Jiantao Huang and Christian Julliard

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Using information in returns we identify the stochastic process of consumption. We find that aggregate consumption reacts over multiple quarters to innovations spanned by financial markets, and this persistent component accounts for over a quarter of consumption variation. These shocks are cross-sectionally priced, drive most of the time series variation in stocks, and a small, yet significant, share of volatility of bonds. Nevertheless, we find no support for stochastic volatility of consumption driving timevarying risk premia. Finally, an otherwise standard recursive utility model based on our estimated process explains both equity premium and risk-free rate puzzles with low risk aversion.

Keywords: consumption dynamics; asset returns; consumption-based asset pricing; term structure (search for similar items in EconPapers)
JEL-codes: C11 E21 E27 E43 G12 (search for similar items in EconPapers)
Date: 2024-09-27
New Economics Papers: this item is included in nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Finance, 27, September, 2024. ISSN: 0022-1082

Downloads: (external link)
http://eprints.lse.ac.uk/126152/ Open access version. (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:126152

Access Statistics for this paper

More papers in LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library LSE Library Portugal Street London, WC2A 2HD, U.K.. Contact information at EDIRC.
Bibliographic data for series maintained by LSERO Manager ().