Seasonality and consumption-based asset pricing

Article Abstract:

Most of the evidence on consumtion-based asset pricing is based on seasonally adjusted consumption data. The consumption-based models have not worked well for explaining asset returns, but with seasonally adjusted data there are reasons to expect spurious rejections of the models. This paper examines asset pricing models using not seasonally adjusted aggregate consumption data. We find evidence against models with time-separable preferences, even when the models incorporate seasonality and allow seasonal heteroskedasticity. A model that uses not seasonally adjusted consumption data and nonseparable preferences with seasonal effects works better according to several criteria. The parameter estimates imply a form of seasonal habit persistence in aggregate consumption expenditures. (Reprinted by permission of the publisher.)

Models, Finance

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Disentangling the coefficient of relative risk aversion from the elasticity of intertemporal substitution: an irrelevance result

Article Abstract:

For homothetic time and state separable preferences, the coefficient of relative risk aversion (CRRA) is equal to the reciprocal of the elasticity of intertemporal substitution (EIS). This paper shows that, when the growth rate of consumption is i.i.d., asset pricing models based upon preferences in which the CRRA and the EIS are no longer linked do not have more explanatory power. Further, in these stochastic environments, estimates of the CRRA in the standard preferences are measures of the true CRRA and not the EIS. These results are fairly accurate descriptions of economies calibrated using United States annual data. (Reprinted by permission of the publisher.)

Risk assessment

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Consumption, aggregate wealth, and expected stock returns

Article Abstract:

The observable variables of asset holdings, consumption, and labor income appear to be cointegrated, permitting fluctuations in the consumption-wealth ratio that strongly predict real stock returns and excess returns. Several models of consumer behavior suggest the log consumption-aggregate wealth summarizes probable returns on aggregate wealth.

United States, Stocks & Other Equity Securities, Statistical Data Included, Management, Stocks, Treasury securities

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