Consumption Volatility Risk

  • Author(s): OLIVER BOGUTH, LARS‐ALEXANDER KUEHN
  • Published: Nov 12, 2013
  • Pages: 2589-2615
  • DOI: 10.1111/jofi.12058

ABSTRACT

We show that time variation in macroeconomic uncertainty affects asset prices. Consumption volatility is a negatively priced source of risk for a wide variety of test portfolios. At the firm level, exposure to consumption volatility risk predicts future returns, generating a spread across quintile portfolios in excess of 7% annually. This premium is explained by cross‐sectional differences in the sensitivity of dividend volatility to consumption volatility. Stocks with volatile cash flows in uncertain aggregate times require higher expected returns.

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