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Cross-sectional consumption-based asset pricing: The importance of consumption timing and the inclusion of severe crises

Author

Listed:
  • Tom Engsted

    (School of Economics and Management, Aarhus University and CREATES)

  • Stig V. Møller

    (Finance Research Group, Aarhus School of Business, Aarhus University and CREATES)

Abstract

By using a beginning-of-period timing convention for consumption, and by including the Great Depression years in the analysis, we show that on annual data from 1926 to 2009 a standard contemporaneous consumption risk model goes a long way in explaining the size and value premiums in cross-sectional data that include both the Fama-French portfolios and industry portfolios. A long run consumption risk variant of the model also produces a high cross-sectional fit. In addition, the equity premium puzzle is significantly reduced in the models. We argue that in evaluating consumption based models, it is important to include both boom and crises periods, i.e. periods with severe consumption declines as well as periods with strong growth, and that the standard post-war data sample may not be well suited in this respect.

Suggested Citation

  • Tom Engsted & Stig V. Møller, 2011. "Cross-sectional consumption-based asset pricing: The importance of consumption timing and the inclusion of severe crises," CREATES Research Papers 2011-07, Department of Economics and Business Economics, Aarhus University.
    • Handle: RePEc:aah:create:2011-07
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    File URL: https://repec.econ.au.dk/repec/creates/rp/11/rp11_07.pdf
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    Cited by:

    1. Tim A. Kroencke, 2017. "Asset Pricing without Garbage," Journal of Finance, American Finance Association, vol. 72(1), pages 47-98, February.
    2. Kevin J. Lansing, 2011. "Asset pricing with concentrated ownership of capital," Working Paper 2011/18, Norges Bank.

    More about this item

    Keywords

    Consumption-based model; long-run risk; the Great Depression; beginning-of-period timing convention; equity premium puzzle; Fama-French and industry portfolios; size and value premiums; GMM; cross-sectional R2.;
    All these keywords.

    JEL classification:

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

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