Pricing innovations in consumption growth: A re-evaluation of the recursive utility model |
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| Authors: | Yuchao Xiao Robert Faff Philip Gharghori Byoung-Kyu Min |
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| Institution: | 1. School of Business and Economics, Monash University, Churchill, Australia;2. UQ Business School, University of Queensland, Brisbane, Queensland, Australia;3. Department of Accounting and Finance, Monash University, Melbourne, Australia;4. Institute of Financial Analysis, University of Neuchatel, Neuchatel, Switzerland |
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| Abstract: | We re-evaluate the cross-sectional asset pricing implications of the recursive utility function of and , using innovations in future consumption growth in our tests. Our empirical specification helps explain the size, value and momentum effects. Specifically, we find that (?) the beta associated with news about consumption growth has a systematic pattern: beta decreases along the size dimension and increases along the book-to-market and momentum dimensions, (??) innovation in consumption growth is significantly priced in asset returns using both the Fama and MacBeth (1973) and the stochastic discount factor approaches, and (???) the model performs better than both the CAPM and Fama–French model. |
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| Keywords: | G12 G14 |
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