Cointegration and consumption risks in asset returns

Published

Journal Article

We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long-run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the cross-sectional variation in equity returns at both short and long horizons; however, this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long-run consumption risks for financial markets.

Full Text

Duke Authors

Cited Authors

  • Bansal, R; Dittmar, R; Kiku, D

Published Date

  • March 1, 2009

Published In

Volume / Issue

  • 22 / 3

Start / End Page

  • 1343 - 1375

Electronic International Standard Serial Number (EISSN)

  • 1465-7368

International Standard Serial Number (ISSN)

  • 0893-9454

Digital Object Identifier (DOI)

  • 10.1093/rfs/hhm085

Citation Source

  • Scopus