Richard Priestley, BI: Consumption fluctuations and expected returns
Department seminar. Richard Priestley is a professor at BI. He will present a paper entitled "Consumption fluctuations and expected returns", co-authored by Victoria Atanasov.
Richard Priestly. Photo: BI
This paper shows that cyclical fluctuations in aggregate consumption around its trend predict future stock returns both in-sample and out-of-sample. This empirical evidence ties consumption decisions of agents to time-variation in future expected stock returns in a manner consistent With rational asset pricing. A fall in consumption below trend indicates bad times when marginal utility of current consumption and future expected returns are high. The predictive information contained in these consumption fluctuations is not confined to bad times and subsumes the predictability of almost all popular forecasting variables which track economic recessions. We also show that changes in the dividend-price ratio are linked to past consumption fluctuations. The predictability of returns and dividend-price ratios supports explanations of asset prices based on models with habit formation mechanisms.
Host: Bård Harstad