Consumption

83 Pages Posted: 12 Mar 2021 Last revised: 11 Nov 2021

See all articles by Svetlana Bryzgalova

Svetlana Bryzgalova

London Business School - Department of Finance

Christian Julliard

London School of Economics & Political Science (LSE) - Department of Finance; Centre for Economic Policy Research (CEPR)

Date Written: February 10, 2021

Abstract

Using information in returns we identify the stochastic process of consumption – the crucial ingredient of most macro-finance models. We find that aggregate consumption reacts over multiple quarters to innovations spanned by financial markets, and this persistent component accounts for 26% of the consumption variation. These innovations drive most of the time series variation of equity returns and are priced in the cross-sections of both bonds and stocks. The data rejects the hypothesis that the stochastic volatility of consumption is proportional to market volatility, and that either of them is priced, posing a novel challenge for consumption-based asset pricing models.

Keywords: Consumption Dynamics, Asset Returns, Consumption-Based Asset Pricing, Term Structure

JEL Classification: E21, E27, G12, E43, C11

Suggested Citation

Bryzgalova, Svetlana and Julliard, Christian, Consumption (February 10, 2021). Available at SSRN: https://ssrn.com/abstract=3783070 or http://dx.doi.org/10.2139/ssrn.3783070

Svetlana Bryzgalova

London Business School - Department of Finance ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom

Christian Julliard (Contact Author)

London School of Economics & Political Science (LSE) - Department of Finance ( email )

United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
218
Abstract Views
669
rank
181,746
PlumX Metrics