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Output gap and consumption risk on the cross-section of stock returns in Korea

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  • Lee, Byeung-Joo
  • Kwon, Ji Ho

Abstract

We examine if output gap can be the conditioning information for consumption-based asset pricing model in the Korean stock market. In an effort to empirically explain the cross-sectional variation of stock returns with economic equilibrium model, our conditioning variable, output gap, enables consumption capital asset pricing model (CCAPM) to explain a substantial variation in the cross-section of stock returns in Korea. In addition, the conditional version of CCAPM with output gap as a conditioning variable can explain the cross-section of stock returns about as well as the Fama-French three- and five-factor model when using future consumption growth. Asset's riskiness is determined by the correlation with consumption growth conditional on the business cycle measured by the output gap. (JEL G12).

Suggested Citation

  • Lee, Byeung-Joo & Kwon, Ji Ho, 2023. "Output gap and consumption risk on the cross-section of stock returns in Korea," International Review of Economics & Finance, Elsevier, vol. 88(C), pages 1020-1034.
    • Handle: RePEc:eee:reveco:v:88:y:2023:i:c:p:1020-1034
    DOI: 10.1016/j.iref.2023.07.031
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    Keywords

    Consumption capital asset pricing model; Conditioning variable; Output gap; Future consumption growth;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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