Department of Economics; HKUST
Clear Water Bay, Kowloon, Hong Kong
NBER Working Papers and Publications
|January 2005||Consumption Risk and the Cost of Equity Capital|
with Ravi Jagannathan: w11026
We demonstrate, using data for the period 1954-2003, that differences in exposure to consumption risk explains cross sectional differences in average excess returns (cost of equity capital) across the 25 benchmark equity portfolios constructed by Fama and French (1993). We use yearly returns on stocks to take into account well documented within year deterministic seasonal patterns in returns, measurement errors in the consumption data, and possible slow adjustment of consumption to changes in wealth due to habit and prior commitments. Consumption during the fourth quarter is likely to have a larger discretionary component. Further, given the availability of more leisure time during the holiday season and the ending of the tax year in December, investors are more likely to review their asse...
Forthcoming in the August 2007 issue of the Journal of Finance under the title, "Lazy Investors, Discretionary Consumption, and the Cross Section of Stock Returns."