Cointegration and Consumption Risks in Asset Returns / Ravi Bansal, Robert Dittmar, Dana Kiku.

Format:

Book

Author/Creator:

Bansal, Ravi.

Contributor:

National Bureau of Economic Research.

Dittmar, Robert.

Kiku, Dana.

Series:

Working Paper Series (National Bureau of Economic Research) no. w13108.

NBER working paper series no. w13108

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2007.

Summary:

We argue that the cointegrating relation between dividends and consumption, a measure of long run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the crosssectional variation in equity returns at both short and long horizons; this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long run consumption risks for financial markets.

Notes:

Print version record

May 2007.