{"id":690,"date":"2017-10-01T02:07:06","date_gmt":"2017-10-01T02:07:06","guid":{"rendered":"http:\/\/mitmgmtfaculty.mit.edu\/japarker\/?page_id=690"},"modified":"2025-02-20T18:32:11","modified_gmt":"2025-02-20T18:32:11","slug":"consumption-risk","status":"publish","type":"page","link":"https:\/\/mitmgmtfaculty.mit.edu\/japarker\/consumption-risk\/","title":{"rendered":"Summary: Consumption Risk and Expected Stock Returns"},"content":{"rendered":"<div id=\"pl-690\"  class=\"panel-layout\" ><div id=\"pg-690-0\"  class=\"panel-grid panel-no-style\" ><div id=\"pgc-690-0-0\"  class=\"panel-grid-cell\" ><div id=\"panel-690-0-0-0\" class=\"so-panel widget widget_mit-pf-wysiwyg widget_mit_pf_wysiwyg panel-first-child panel-last-child\" data-index=\"0\" ><div class=\"textwidget\"><h2>Consumption Risk and Expected Stock Returns<\/h2>\nJanuary 2003\n\nFollowing the textbook CCAPM, the consumption risk of an asset is typically measured as the contemporaneous covariance of the marginal utility of consumption and the return on that asset. When measured this way, consumption risk is too small to explain the observed equity premium, is negatively related to expected excess returns over time, and fails to explain the cross-sectional di.erences in average returns of the Fama and French (25) portfolios. This paper evaluates the central insight of the CCAPM -- that consumption risk determines returns -- but take the model less literally by allowing the possibility that households do not instantaneously and completely adjust consumption to the news revealed about wealth in a period. The long-term consumption risk of the aggregate market is signficantly larger than the contemporaneous risk, is positively related to expected excess returns over time, and is highly correlated with the cross-sectional di.erences in average returns of the Fama and French (25) portfolios.\n\nThe paper\u00a0<strong><a href=\"http:\/\/papers.nber.org\/papers\/w9548.pdf\" target=\"_blank\" rel=\"noopener noreferrer\">from the NBER<\/a><\/strong>\nThe paper from <strong><a href=\"http:\/\/doi.org\/10.1257\/000282803321947380\" target=\"_blank\" rel=\"noopener noreferrer\">AER<\/a><\/strong>\n<strong><a href=\"https:\/\/www.dropbox.com\/s\/q1jhstbemf0m5js\/AEAPP03Replication.zip?dl=1\" target=\"_blank\" rel=\"noopener noreferrer\">Complete data and programs for replication<\/a>\u00a0<\/strong><\/div><\/div><\/div><\/div><\/div>","protected":false},"excerpt":{"rendered":"<p>Consumption Risk and Expected Stock Returns January 2003 Following the textbook CCAPM, the consumption risk of an asset is typically measured as the contemporaneous covariance of the marginal utility of consumption and the return on that asset. When measured this way, consumption risk is too small to explain the observed equity premium, is negatively related [&hellip;]<\/p>\n","protected":false},"author":38,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"template-two-column.php","meta":{"_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"class_list":["post-690","page","type-page","status-publish","hentry"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v24.0 (Yoast SEO v25.8) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>MIT Sloan Faculty: Jonathan A. 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