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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.

Original languageEnglish
JournalJournal of Finance
Pages (from-to)1677-1713
Number of pages37
Publication statusPublished - 2020

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