TY  - JOUR
AU  - Parker,Jonathan A.
TI  - Consumption Risk and Expected Stock Returns
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9548
PY  - 2003
Y2  - March 2003
UR  - http://www.nber.org/papers/w9548
L1  - http://www.nber.org/papers/w9548.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
AB  - Following the textbook C-CAPM, 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 differences in average returns of the Fama and French (25) portfolios. This paper evaluates the central insight of the C-CAPM - 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 and is positively related to expected excess returns over time. The long-term consumption risk of different portfolios largely explains the observed differences in average returns.
ER  -