Working Paper: NBER ID: w16073
Authors: Nikolai Roussanov
Abstract: Value stocks covary with aggregate consumption more than growth stocks during periods when financial wealth is low relative to consumption. However, the conditional value premium does not exhibit such countercyclical behavior. Consequently, a one-factor conditional consumption-based asset pricing model can be rejected without making any arbitrary assumptions on the dynamics of the price of risk or the conditional moments. Empirical evidence is somewhat more consistent with a consumption-based model augmented with an aggregate wealth growth factor, which can be motivated by either recursive preferences or relative wealth concerns.
Keywords: No keywords provided
JEL Codes: C14; G1; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| value stocks exposure to consumption risk increases (E21) | conditional expected returns of value stocks do not rise significantly (G12) |
| value stocks do not show a proportionate increase in conditional expected returns compared to growth stocks (G12) | challenges the standard conditional CCAPM (G19) |
| expected returns on value portfolios do not rise significantly in bad economic states where consumption risk is high (D11) | underlies the economic rejection of the conditional CCAPM (D11) |
| conditional covariances decline in bad states (C10) | aligns with the economic intuition that value stocks should be riskier in such contexts (G40) |