Asset Pricing.
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Nearly 75 members and guests of the NBER's Program on Asset Pricing met in Cambridge on November 9. Organizers Luis M. Viceira and Tuomo Vuolteenaho, both of NBER and Harvard University, chose these papers to discuss:
Ravi Bansal, Duke University, and Robert F. Dittmar and Christian T. Lundblad, Indiana University, "Consumption, Dividends, and the Cross-Section of Equity Returns"
Discussant: Martin Lettau, New York University
Andrew Ang and Geert Bekaert, NBER and Columbia University, "Stock Return Predictability: Is It There?"
Discussant: Samuel Thompson, Harvard University
Jonathan Lewellen, MIT, "Predicting Returns with Financial Ratios"
Discussant: Robert F. Stambaugh, NBER and University of Pennsylvania
Joao F. Gomes and Lu Zhang, University of Pennsylvania, and Amir Yaron, NBER and University of Pennsylvania, "Asset Pricing Implications of Firms' Financing Constraints"
Discussant: John H. Cochrane, NBER and University of Chicago
Michael W. Brandt, NBER and University of Pennsylvania; John H. Cochrane; and Pedro Santa-Clara, University of California, Los Angeles, "International Risk Sharing is Better Than You Think (Or Exchange Rates Are Much Too Smooth)"
Discussant: Ravi Jagannathan, NBER and Northwestern University
Lubos Pastor University of Chicago, and Robert F. Stambaugh, "Liquidity Risk and Expected Stock Returns"
Discussant: Jiang Wang, NBER and MIT
A central economic idea is that an asset's risk premium is determined by its ability to insure against fluctuations in consumption (that is, by consumption beta). Consistent with this intuition, Bansal, Dittmar, and Lundblad show that a model with constant consumption betas does extremely well in capturing cross-sectional differences in risk premiums. More specifically, the authors present a dynamic general equilibrium model in which cross-sectional differences in an asset's consumption beta are determined by cross-sectional differences in the exposure of the asset's dividends to aggregate consumption - that is, by the consumption leverage of the asset's dividends. They measure this consumption leverage in one case as the stochastic cointegration parameter between dividends and consumption and in another by the covariance of ex-post dividend growth rates with the expected growth rate of consumption. Cross-sectional differences in this consumption leverage parameter can explain up to 65 percent of the cross-sectional variation in risk premiums across 31 portfolios - which include the...
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