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Consumption Fluctuations and Expected Returns
Author(s) -
ATANASOV VICTORIA,
MØLLER STIG V.,
PRIESTLEY RICHARD
Publication year - 2020
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/jofi.12870
Subject(s) - predictability , economics , stock (firearms) , predictive power , consumption (sociology) , econometrics , capital asset pricing model , marginal utility , asset (computer security) , variable (mathematics) , financial economics , microeconomics , computer science , statistics , mathematics , mechanical engineering , mathematical analysis , philosophy , social science , computer security , epistemology , sociology , engineering
ABSTRACT This paper introduces a novel consumption‐based variable, cyclical consumption, and examines its predictive properties for stock returns. Future expected stock returns are high (low) when aggregate consumption falls (rises) relative to its trend and marginal utility from current consumption is high (low). We show that the empirical evidence ties consumption decisions of agents to time variation in returns in a manner consistent with asset pricing models based on external habit formation. The predictive power of cyclical consumption is not confined to bad times and subsumes the predictability of many popular forecasting variables.