NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Risk and Return: Consumption versus Market Beta

N. Gregory Mankiw, Matthew D. Shapiro

NBER Working Paper No. 1399 (Also Reprint No. r0822)
Issued in February 1987
NBER Program(s):   EFG

The interaction between the macroeconomy and asset markets is central to a variety of modern theories of the business cycle. Much recentwork emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.

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Document Object Identifier (DOI): 10.3386/w1399

Published: Mankiw, N. Gregory and Matthew D. Shapiro. "Risk and Return: Consumption Beta versus Market Beta," Review of Economics and Statistics, Vol. 68, No. 3, August 1986, pp. 452-459.

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