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Factors, Risk and the Economy

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Seaport DE
Hosted By: American Finance Association
  • Chair: Jules van Binsbergen, University of Pennsylvania

Priceless Consumption

Frederico Belo
,
INSEAD, University of Minnesota and NBER
Andres Donangelo
,
University of Texas-Austin

Abstract

This paper studies the type of consumption that, despite its economic relevance, is unaccounted for in aggregate measures and thus ignored in most consumption-based models. We denote this latent consumption emph{priceless} given that it cannot be bought or sold for any amount of money. Although not directly observable, priceless consumption can be identified through its heterogeneous effects across different consumption categories. We propose a structural estimation methodology to recover a priceless consumption series from the joint dynamics of the components of aggregate consumption. The estimation results show that priceless consumption is a large and volatile portion of total consumption. Our findings provide supporting evidence for the validity of the consumption-based CAPM by showing that its performance markedly improves once we account for the priceless consumption.

The Cross-Section of Stock Returns and the Timing of Cash Flows

Niels Gormsen
,
University of Chicago
Eben Lazarus
,
Massachusetts Institute of Technology

Abstract

We propose a duration-based explanation for the return to major equity risk factors, including value, profitability, investment, low risk, and payout factors. Both in the US and globally, firms that according to these factors have high expected returns also have a short cash-flow duration, meaning that these firms are expected to earn most of their cash flows in the near future. The returns to the factors can thus be explained by a simple model where near-future cash flows have high risk-adjusted returns, which is consistent with the evidence on the equity term structure. We find evidence for such a model using a novel dataset of single-stock dividend futures that allow us to study fixed-maturity equity claims for a cross-section of firms.

Macroeconomic Tail Risks and Asset Prices

David Schreindorfer
,
Arizona State University

Abstract

I document that dividend growth and returns on the aggregate U.S. stock market are more correlated with consumption growth in bad economic times. In a consumption-based asset pricing model with a generalized disappointment averse investor and small, IID consumption shocks, this feature results in a realistic equity premium despite low risk aversion. The model is consistent with the main facts about stock market risk premia inferred from equity index options, remains tightly parameterized, and allows for analytical solutions for asset prices. An extension with non-IID dynamics accounts for excess volatility and return predictability while preserving the model's consistency with option moments.

Factor Momentum and the Momentum Factor

Sina Ehsani
,
Northern Illinois University
Juhani Linnainmaa
,
University of Southern California

Abstract

Momentum in individual stock returns emanates from momentum in factor returns. Most factors are positively autocorrelated: the average factor earns a monthly return of 1 basis point following a year of losses and 53 basis points following a positive year. Factor momentum explains all forms of individual stock momentum. Stock momentum strategies indirectly time factors: they profit when the factors remain autocorrelated, and crash when these autocorrelations break down. Our key result is that momentum is not a distinct risk factor; it aggregates the autocorrelations found in all other factors.
Discussant(s)
Toomas Laarits
,
New York University
Andrei Goncalves
,
University of North Carolina-Chapel Hill
Andrea Tamoni
,
Rutgers University
Dong Lou
,
London School of Economics
JEL Classifications
  • G1 - General Financial Markets