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Surplus Consumption Ratio and Expected Stock Returns

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  • Ghattassi, I.

Abstract

Based on CAMPBELL and COCHRANE [1999] Consumption-Based Asset Pricing Model (C)CAPM with habit formation, this paper provides empirical evidence in favor of the importance of habit persistence in asset pricing. Using U.S data, we show that the surplus consumption ratio is a strong predictor of excess returns at long-horizons and that it captures a component of expected returns, not explained by the consumption-wealth ratio. Moreover, this paper shows that the (C)CAPM with habit formation performs far better than the standard (C)CAPM in accounting for the cross-sectional variations in average excess returns on the 25 FAMA-FRENCH portfolios sorted by size and book-to-market value.

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  • Ghattassi, I., 2013. "Surplus Consumption Ratio and Expected Stock Returns," Working papers 417, Banque de France.
    • Handle: RePEc:bfr:banfra:417
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    References listed on IDEAS

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    More about this item

    Keywords

    Habit formation; Surplus consumption ratio; Expected returns; Time series predictability; Cross section returns.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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