Long‐Run Stockholder Consumption Risk and Asset Returns

Abstract

We provide new evidence on the success of long-run risks in asset pricing by focusing on the risks borne by "stockholders". Exploiting microlevel household consumption data, we show that long-run stockholder consumption risk better captures cross-sectional variation in average asset returns than aggregate or nonstockholder consumption risk, and implies more plausible risk aversion estimates. We find that risk aversion around 10 can match observed risk premia for the wealthiest stockholders across sets of test assets that include the 25 Fama and French portfolios, the market portfolio, bond portfolios, and the entire cross-section of stocks. Copyright (c) 2009 the American Finance Association.

An Estimation of Economic Models with Recursive Preferences

“…In addition, the HJ distance is about the same when  = 1, equal to 0.448 compared to 0.451 when  is unrestricted (the HJ distance is slightly smaller when  = 1 because, when  is fixed, one fewer parameter is estimated, reducing the AIC penalty). Thus, the results using W=G −1  are largely supportive of the conjecture of Malloy, Moskowitz, and Vissing-Jorgensen (2009). We note, however, that if the model with  = 1 is misspecified, parameter estimates can be sensitive to the objective function minimized, as we find here.…”

“…Second, since the CEX sample is short (1982 to 2002), the construction of mimicking factors allows a longer time-series of data to be constructed. The procedure follows Malloy, Moskowitz, and Vissing-Jorgensen (2009). We project the average consumption growth of stockholders on a set of instruments (available over a longer period) and use the estimated coefficients to construct a longer time-series of stockholder consumption growth, spanning the same sample as the aggregate consumption data.…”

Consumption-Based Asset Pricing with Loss Aversion

“…The covariation between the market returns and the shocks to aggregate consumption, both immediate and long-term, is too low in the data to generate the equity premium at reasonable levels of risk aversion (the standard recursive utility model requires γ = 79, and my model would require γ ≈ 35, in order to match the equity premium). In Malloy et al (2009), the authors adapt the empirical set-up of Hansen, Heaton and Li (2008) to stockholders' consumption (in contrast to the aggregate consumption). They argue that the relevant Euler Equation for equity is the one resulting from the optimization problem of the stock market's participants.…”

Who Bears Aggregate Fluctuations and How?

“…N. Gregory Mankiw and Stephen P. Zeldes (1991), Parker (2001) and Christopher Malloy, Tobias J. Moskowitz, and Vissing-Jørgensen (2008)). This work studies differences in the covariation of consumption growth only with equity returns and not with aggregate fluctuations more generally.…”