Consumption, dividends, and the cross section of equity returns

Journal Article (Journal Article)

We show that aggregate consumption risks embodied in cash flows can account for the puzzling differences in risk premia across book-to-market, momentum, and size-sorted portfolios. The dynamics of aggregate consumption and cash flow growth rates, modeled as a vector autoregression, are used to measure the consumption beta of discounted cash flows. Differences in these cash flow betas account for more than 60% of the cross-sectional variation in risk premia. The market price for risk in cash flows is highly significant. We argue that cash flow risk is important for interpreting differences in risk compensation across assets.

Full Text

Duke Authors

Cited Authors

  • Bansal, R; Dittmar, RF; Lundblad, CT

Published Date

  • August 1, 2005

Published In

Volume / Issue

  • 60 / 4

Start / End Page

  • 1639 - 1672

International Standard Serial Number (ISSN)

  • 0022-1082

Digital Object Identifier (DOI)

  • 10.1111/j.1540-6261.2005.00776.x

Citation Source

  • Scopus