TY  - JOUR
AU  - Parker,Jonathan A.
AU  - Julliard,Christian
TI  - Consumption Risk and Cross-Sectional Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9538
PY  - 2003
Y2  - March 2003
UR  - http://www.nber.org/papers/w9538
L1  - http://www.nber.org/papers/w9538.pdf
N1  - Author contact info:
Jonathan Parker
Finance Department
Kellogg School of Management
Northwestern University
2001 Sheridan Road
Evanston, IL  60208-2001
Tel: 847/491-4113
Fax: 847/491-5719
E-Mail: Jonathan-Parker@Kellogg.Northwestern.edu

Christian Julliard
Department of Economics
London School of Economics
and Political Science
Houghton Street
London WC2A 2AE
Tel: +44 (0) 20 7955 7510
Fax: +44 (0) 20 7955 6592
E-Mail: C.Julliard@lse.ac.uk
AB  - This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (C-CAPM) that an asset's expected return is determined by its equilibrium risk to consumption. Rather that measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth -- as done in the previous literature on the C-CAPM and the pattern of cross-sectional returns -- we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk has little predictive power for explaining the pattern of average returns across the Fama and French (25) portfolios, ultimate consumption risk is highly statistically significant in explaining average returns and explains a large fraction of the variation in average returns. Aditionally, estimates of the average risk-free real rate of interest and the coefficient of relative risk aversion of the representative household based on ultimate consumption risk are more reasonable than those obtained using contemporaneous consumption risk.
ER  -