Title

Consumption Risk and the Cross-Section of Expected Returns

Author(s)

Jonathan A. Parker Jonathan Parker (Princeton University and NBER)

Christian Julliard Christian Julliard (Princeton University)

Abstract

This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (CCAPM) that an asset?s expected return is determined by its equilibrium risk to consumption. Rather than measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth ? as done in the previous literature on the CCAPM and the pattern of crosssectional returns ? we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk explains little of the variation in observed average returns across the Fama and French 25 portfolios, ultimate consumption risk at a horizon of three years explains a large fraction of this variation.

Creation Date

2004-03

Section URL ID

WWSEcon

Paper Number

dp229.pdf

URL

http://personal.lse.ac.uk/julliard/papers/CRCSER.pdf

File Function

Jel

G12, G11, E21

Keyword(s)

Consumption Capital Asset Pricing Model, Expected returns, Equity premium, Consumption risk, Consumption smoothing

Suppress

false

Series

4