Consumption Fluctuations and Expected Returns

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  • Victoria Atanasov, University of Mannheim
  • ,
  • Stig V. Møller
  • Richard Priestley, BI Norwegian Business School

This paper introduces a novel consumption-based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.

OriginalsprogEngelsk
TidsskriftJournal of Finance
Vol/bind75
Nummer3
Sider (fra-til)1677-1713
Antal sider37
ISSN0022-1082
DOI
StatusUdgivet - 2020

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