Asset Pricing with Countercyclical Household Consumption Risk

We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of house...

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Bibliographic Details
Published in:The Journal of finance (New York) 2017-02, Vol.72 (1), p.415-459
Main Authors: CONSTANTINIDES, GEORGE M., GHOSH, ANISHA
Format: Article
Language:English
Subjects:
Abnormal returns
Consumption
Decision making models
Growth models
Households
Risk premiums
Stock prices
Studies
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Summary:We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical, while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross section of excess returns.
ISSN:0022-1082
1540-6261
DOI:10.1111/jofi.12471