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TitleConsumption growth, preference for smoothing, changes in expectations and risk premium
Author(s)Armada, Manuel José da Rocha
Sousa, Ricardo M.
Wohar, Mark E.
KeywordsConsumption growth
Intertemporal budget constraint
Consumption–wealth ratio
Expected returns
Asset pricing
Issue dateMay-2015
JournalQuarterly Review of Economics and Finance
Abstract(s)This paper derives a relationship between consumption growth, the consumption–wealth ratio and its first-difference, and asset returns. Using quarterly data for sixteen OECD countries, we find that the three-factor asset pricing model explains a large fraction of the variation in real stock returns. The model captures: (i) the concerns of agents with states of the world in which consumption growth is low; (ii) the preference of investors for a smooth consumption path as implied by the intertemporal budget constraint; and (ii) the role played by shifts in expectations about future returns due to positive or negative news about their wealth
Publisher version
AccessRestricted access (UMinho)
Appears in Collections:NIPE - Artigos em Revistas de Circulação Internacional com Arbitragem Científica

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