Title: Consumption-based risk of bonds and stocks
Authors: Svetlana Bryzgalova - Stanford Graduate School of Business (United States) [presenting]
Christian Julliard - London School of Economics (United Kingdom)
Abstract: Aggregate consumption growth reacts slowly, but significantly, to bond and stock return innovations. As a consequence, slow consumption adjustment (SCA) risk, measured by the reaction of consumption growth cumulated over many quarters following a return, can explain most of the cross-sectional variation of expected bond and stock returns. Moreover, SCA shocks explain about a quarter of the time series variation of consumption growth, a large part of the time series variation of stock returns, and a significant (but small) fraction of the time series variation of bond returns, and have substantial predictive power for future consumption growth.