Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns

@inproceedings{Jacobs2001IdiosyncraticCR,
  title={Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns},
  author={Kris Jacobs and Kevin Wang},
  year={2001}
}
This paper investigates the importance of idiosyncratic consumption risk for the cross-sectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We o®er evidence that the cross-sectional variance of consumption growth is also a priced factor. This demonstrates that consumers are not fully insured against idiosyncratic consumption risk, and that asset… CONTINUE READING
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