Long-horizon consumption risk and the cross-section of returns: New tests and international evidence

Joachim Grammig (), Andreas Schrimpf and Michael Schuppli

No 09-02, CFR Working Papers from University of Cologne, Centre for Financial Research (CFR)

Abstract: This paper investigates whether measuring consumption risk over long horizons can improve the empirical performance of the Consumption CAPM for size and value premia in international stock markets (US, UK, and Germany). In order to account for commonalities in size and book-tomarket sorted portfolios, we also include industry portfolios in our set of test assets. Our results show that, contrary to the findings of Parker and Julliard (2005), the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. At the same time, however, measuring consumption risk over longer horizons typically yields lower risk-aversion estimates. Thus, our results suggest that more plausible parameter estimates - as opposed to lower pricing errors - can be regarded as the main achievement of the long-horizon Consumption CAPM.

Keywords: Consumption-based Asset Pricing; Long-Run Consumption Risk; Value Puzzle; International Stock Markets (search for similar items in EconPapers)
JEL-codes: G12 G15 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (2)

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Journal Article: Long-horizon consumption risk and the cross-section of returns: new tests and international evidence (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfrwps:0902

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