Working Paper: NBER ID: w20110
Authors: George M. Constantinides; Anisha Ghosh
Abstract: We show that shocks to household consumption growth are negatively skewed, persistent, countercyclical, and drive asset prices. We construct a parsimonious model where heterogeneous households have recursive preferences. A single state variable drives the conditional cross-sectional moments of household consumption growth. The estimated model fits well the unconditional cross-sectional moments of household consumption growth and the moments of the risk-free rate, equity premium, price-dividend ratio, and aggregate dividend and consumption growth. The model-implied risk-free rate and price-dividend ratio are procyclical while the market return has countercyclical mean and variance. Finally, household consumption risk explains the cross-section of excess returns.
Keywords: Asset Pricing; Household Consumption; Countercyclical Risk; Equity Premium
JEL Codes: D31; D52; E32; E44; G01; G12; J60
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| household consumption risk increases (D11) | risk-free rate declines (E43) |
| household consumption risk increases (D11) | expected market return increases (G17) |
| household consumption risk increases (D11) | price-dividend ratio increases (G35) |
| negative skewness and persistence of household consumption growth (D12) | asset prices (G19) |
| household consumption shocks (D10) | countercyclical risks (E32) |