Asset Pricing with Garbage

Alexi Savov

200 citations0/0 files storedThe Journal of Finance

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Financial Markets and Investment Strategies Financial Risk and Volatility Modeling Economic theories and models

Abstract

ABSTRACT A new measure of consumption, garbage, is more volatile and more correlated with stocks than the canonical measure, National Income and Product Accounts (NIPA) consumption expenditure. A garbage‐based consumption capital asset pricing model matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium‐risk‐free rate puzzle. These results carry through to European data. In a cross‐section of size, value, and industry portfolios, garbage growth is priced and drives out NIPA expenditure growth.

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References

1993Common risk factors in the returns on stocks and bonds 1992The Cross-Section of Expected Stock Returns 1973Risk, Return, and Equilibrium: Empirical Tests 1965A Theory of the Allocation of Time 2012The Econometrics of Financial Markets 1985The equity premium: A puzzle 1999By Force of Habit: A Consumption‐Based Explanation of Aggregate Stock Market Behavior 1978Asset Prices in an Exchange Economy

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