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We uncover a strong comovement of the stock market risk—return trade-off with the consumption—wealth ratio (CAY). The finding reflects time-varying investment opportunities rather than countercyclical aggregate relative risk aversion. Specifically, the partial risk—return trade-off is positive and constant when we control for CAY as a proxy for investment opportunities. Moreover, conditional market variance scaled by CAY is negatively priced in the cross-section of stock returns. Our results are consistent with a limited stock market participation model, in which shareholders require an illiquidity premium that increases with CAY, in addition to the risk premium that is proportional to conditional market variance.

This paper integrates seemingly disjoint studies on consumer behavior in micro and macroanalyses via an intertemporal two-stage budgeting procedure with durable goods and liquidity constraints. The model specifies an indirect utility function as a function of nondurable consumption, commodity (nondurables) prices, and durables stock, and derives the demand functions for nondurable goods. A demand function for durable goods is derived in an adjustment cost framework. The consumption growth equation accounts for relative price effects with precautionary saving, durables stock, and liquidity constraints. The stochastic discount factor is approximated by a time-varying linear function of nondurable consumption growth, commodity price growth, durables stock growth, and disposable income growth. The demand functions for six nondurable goods and services are jointly estimated with the Euler equations for bonds, stocks, and durable goods with allowance for liquidity constraints, using US data. Estimation provides new findings for intertemporal consumption and a multifactor consumption-based capital asset pricing model.

We test conditional consumption capital asset pricing models (CCAPMs) in the Australian equity market The conditional variables used are Lettau and Ludvigson's (2001a, b) consumption-wealth ratio, Campbell and Cochrane's (1999) surplus consumption ratio and Santos and Veronesi's (2006) labour income to consumption ratio. We examine the cross-sectional implications of these variables using the Fama-French 25 size and book-to-market portfolios and Australian industry portfolios. The Fama-MacBeth (1973) cross-sectional regressions on the 25 size/book-to-market portfolios show that the conditional models perform better than the unconditional models. However, these conditional models cannot outperform the Fama-French three-factor model. The conditional CCAPM, with the labour income to consumption ratio as a scaling factor, can match more closely the performance of the Fama-French three-factor model. We also find that consumption growth is non-contemporaneously related to portfolio returns. [PUBLICATION ABSTRACT]

I extend the Epstein-Zin-Iognormal consumption-based asset-pricing model to allow for general i.i.d. consumption growth. Information about the higher moments—equivalently, cumulants—of consumption growth is encoded in the cumulant-generating function. I use the framework to analyse economies with rare disasters, and argue that the importance of such disasters is a double-edged sword: parameters that govern the frequency and sizes of rare disasters are critically important for asset pricing, but extremely hard to calibrate. I show how to sidestep this issue by using observable asset prices to make inferences without having to estimate higher moments of the underlying consumption process. Extensions of the model allow consumption to diverge from dividends, and for non-i.i.d. consumption growth.

Purpose This study aims to examine whether the consumption capital asset pricing model (CCAPM) can explain the Australian equity market premium under incomplete markets with heterogeneous households. It provides the first household-level test for Australia and revisits prior work that relies mainly on aggregate consumption data, the complete market assumption and implied relative risk aversion (RRA) estimates that are implausibly high. Design/methodology/approach Using microdata from the Household, Income and Labour Dynamics in Australia longitudinal household survey (2006–2017), we construct four measures of household consumption and estimate the stochastic discount factor with unconditional and conditional CCAPM Euler equations under complete and incomplete market settings. We then extend the analysis from the market portfolio to size and value portfolios. Findings Household risk sharing in Australia does not fully smooth idiosyncratic consumption shocks. In the incomplete market setting, the CCAPM with disaggregated consumption matches the observed market risk premium with an RRA of about 2.16, whereas the complete market model requires an implausibly high RRA near 50. Total Consumption and Essentials explain the market premium, while Non-Durables and Services better capture premia associated with the equally weighted market, size portfolios and value portfolios. Conditioning on lagged market information modestly lowers effective risk aversion. Originality/value This study provides the first household-level CCAPM test for Australia under incomplete markets. It shows that cross-sectional dispersion in marginal utilities and careful measurement of household consumption restore sufficient pricing kernel volatility to reconcile the CCAPM with observed equity premia and clarify how consumption risk shapes asset prices.

We empirically examine the asset pricing implications of the Beckerian framework of household production, where utility is derived from both market consumption and home produced goods. We propose residential electricity usage as a real-time proxy for the service flow from household capital, because electricity is used in most modern-day household production activities and it cannot be easily stored. Using U.S. residential electricity usage from 1955 to 2012, our model based on household production explains the equity premium and the cross section of expected stock returns (including those of industry portfolios) with an R 2 of 71%. This paper was accepted by Jerome Detemple, finance.

This paper presents estimates of key preference parameters of the Epstein and Zin (1989, 1991) and Weil (1989) recursive utility model, evaluates the model's ability to fit asset return data relative to other asset pricing models, and investigates the implications of such estimates for the unobservable aggregate wealth return. Our empirical results indicate that the estimated relative risk aversion parameter ranges from 17 to 60, with higher values for aggregate consumption than for stockholder consumption, while the estimated elasticity of intertemporal substitution is above 1. In addition, the estimated model‐implied aggregate wealth return is found to be weakly correlated with the Center for Research in Security Prices value‐weighted stock market return, suggesting that the return to human wealth is negatively correlated with the aggregate stock market return.

This paper examines the stochastic implications of permanent income hypothesis for speculative prices from a sample of economic data from 1967 to 2017 in the United States. One of the standard assumptions of the Consumption-Based Capital Asset Pricing Model (CCAPM)-the time separability of utility-is relaxed in the model specification of Mankiw and Shapiro (1985) and finds that the expected change in earnings has no obvious connection with stock price changes for monthly and yearly data. This finding, while accepting the excess sensitivity of consumption to income, suggests that the past consumption-unconstrained by expected change in income of that period-influences the utility of future consumption. Disposable income and consumption expenditure are highly autoregressive and non-stationary for monthly, quarterly, and yearly time series. The hypothesis that disposable income follows a random walk is clearly rejected for three-time horizons and the consumption is excessively sensitive to income for monthly and yearly data. The rejection of income follows a random walk due to liquidity constraint for quarterly data. The results of impulse response functions question the OLS/AR type of (univariate) regressions used to test the randomness of disposable income and the excess sensitivity. Equity price changes are, however, found to be completely independent from disposable income for frequent observations of income, which suggests that the use of consumption as a variable in capital asset pricing is a subjective assessment. Furthermore, the empirical evidence shows that the equity price changes cannot be effectively forecasted by the predictable change in disposable income.

We develop and estimate several variants of consumption-based capital asset pricing models (CCAPMs) and compare their capacity in explaining the stock price dynamics of China. We conclude that adding housing to CCAPM and habit formation models yields no significant benefit in predicting stock returns, but adding housing to recursive utility models does improve predictions. Furthermore, the labor income model cannot help reduce pricing errors, but the collateral constraint model outperforms almost all other models. Some models cannot even defeat the simple autoregressive model in stock return prediction. Overall, the H-recursive utility model has the best prediction performance. Directions for future research are discussed.

Is the risk-aversion parameter in the intertemporal consumption capital asset pricing model \"small\" as stated by Hansen and Singleton or is its reciprocal-the intertemporal elasticity of substitution-small, as stated by Hall? We attribute the disparate estimates of this fundamental parameter not to failures of instrument admissibility as do Hall and Hansen and Singleton but rather to failures of instrumentrelevance. That is, the disparate estimates reflect near nonidentification due to the unpredictability of asset returns and consumption growth. Imposing natural identifying restrictions from the risk-aversion perspective and the intertemporal substitution perspective yields low and stable estimates in each case.