Consumption Risk Over the Frequency Domain
40 Pages Posted: 1 Mar 2007 Last revised: 22 Aug 2008
Date Written: February 2007
In this paper we extend the concept of ultimate consumption risk analyzed by Parker and Julliard (Journal of Political Economy, 2005), and we evaluate the Consumption Capital Asset Pricing Model by employing as an explanatory variable consumption risk over the frequency domain. We find that at lower frequencies consumption risk explains up to 98% of the cross-sectional variation of expected returns and the equity premium puzzle is resolved. Our evidence is consistent with a coefficient of risk aversion between 1 and 4 in the very long run.
Keywords: C-CAPM, consumption risk, frequency domain, equity premium, risk aversion
JEL Classification: G11, G12, C13
Suggested Citation: Suggested Citation