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Consumption, Dividends, and the Cross Section of Equity Returns
Author(s) -
BANSAL RAVI,
DITTMAR ROBERT F.,
LUNDBLAD CHRISTIAN T.
Publication year - 2005
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2005.00776.x
Subject(s) - economics , cash flow , econometrics , financial economics , equity (law) , risk premium , monetary economics , consumption (sociology) , operating cash flow , finance , social science , sociology , political science , law
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.