Consumption in Asset Returns

Bryzgalova, S and Julliard, C (2020) Consumption in Asset Returns. Discussion Paper. Systemic Risk Centre Discussion Papers DP 92. OPEN ACCESS


Consumption dynamics are hard to measure accurately in the data, yet they are the crucial ingredient of macro-finance asset pricing models. The central insight of these models is that, in equilibrium, both consumption and returns are largely driven by the same fundamental shocks. Therefore, we use the information in returns to identify the underlying process of consumption. We find that aggregate consumption growth reacts over multiple quarters to the innovations spanned by bond and stock returns. This persistent component: (a) is economically large i.e. it accounts for about 26% of the total variation in consumption; (b) drives most of the time series variation of stocks and a significant (yet small) fraction of bond returns; (c) is reflected in the term structure of interest rates; and (d) is priced jointly in the cross-sections of bond and stock returns. These results, stable across estimation techniques and robustness checks, pose a novel challenge for asset pricing theory.

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Item Type: Monograph (Discussion Paper)
Subject Areas: Finance
Additional Information:

This paper is published as part of the Systemic Risk Centre’s Discussion Paper Series.
The support of the Economic and Social Research Council (ESRC) in funding the SRC is gratefully acknowledged [grant number ES/R009724/1].

Funder Name: Economic and Social Research Council
Date Deposited: 03 Nov 2020 15:27
Date of first compliant deposit: 01 Feb 2021
Last Modified: 28 Feb 2023 10:46

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