Composition of Wealth, Conditioning Information, and the Cross-Section of Stock Returns
Value stocks covary with aggregate consumption more than growth stocks during periods when financial wealth is low relative to consumption. However, the conditional value premium does not exhibit such countercyclical behavior. Consequently, a one-factor conditional consumption-based asset pricing model can be rejected without making any arbitrary assumptions on the dynamics of the price of risk or the conditional moments. Empirical evidence is somewhat more consistent with a consumption-based model augmented with an aggregate wealth growth factor, which can be motivated by either recursive preferences or relative wealth concerns.
I am grateful to John Cochrane and Pietro Veronesi for their advice and feedback on the early drafts of this paper. I have also benefited from conversations with and comments by Andy Abel, Federico Bandi, Frederico Belo, David Chapman, George Constantinides, Kent Daniel, Greg Duffee, João Gomes, Lars Hansen, John Heaton, Ravi Jagannathan, Don Keim, Mark Klebanov, Martin Lettau, Jon Lewellen, Sydney Ludvigson, Hanno Lustig, Craig Mackinlay, Toby Moskowitz, Per Mykland, Jonathan Parker, Ľuboš Pástor, Monika Piazzesi, Lukasz Pomorski, Scott Richard, Enrique Sentana, Ivan Shaliastovich, Nick Souleles, Rob Stambaugh, Annette Vissing-Jørgensen, Jessica Wachter, Yuhang Xing, Amir Yaron, Moto Yogo, Lu Zhang, the anonymous referee, and William Schwert (the editor), as well as seminar participants at Chicago GSB, Northwestern (Kellogg), Virginia (McIntire), Wharton, WFA 2005 conference, NBER Summer Institute 2009 Asset Pricing meeting, 2010 Texas Finance Festival, and Vanderbilt conference on Human Capital and Finance. I thank Ken French, Sydney Ludvigson and Annette Vissing-Jørgensen for making their datasets available. Financial support from the Wharton School under Cynthia and Bennett Golub Endowed Faculty Scholarship is gratefully acknowledged. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.
Roussanov, Nikolai, 2014. "Composition of wealth, conditioning information, and the cross-section of stock returns," Journal of Financial Economics, Elsevier, vol. 111(2), pages 352-380. citation courtesy of