Pricing innnovations in consumption growth: A re-evaluation of the recursive utility model

Xiao, Yuchao, Faff, Robert, Gharghori, Philip and Min, Byoung-Kyu (2013) Pricing innnovations in consumption growth: A re-evaluation of the recursive utility model. Journal of Banking and Finance, 37 11: 4465-4475. doi:10.1016/j.jbankfin.2012.08.015

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Author Xiao, Yuchao
Faff, Robert
Gharghori, Philip
Min, Byoung-Kyu
Title Pricing innnovations in consumption growth: A re-evaluation of the recursive utility model
Journal name Journal of Banking and Finance   Check publisher's open access policy
ISSN 0378-4266
1872-6372
Publication date 2013
Year available 2013
Sub-type Article (original research)
DOI 10.1016/j.jbankfin.2012.08.015
Open Access Status
Volume 37
Issue 11
Start page 4465
End page 4475
Total pages 11
Place of publication Amsterdam, The Netherlands
Publisher Elsevier BV
Collection year 2014
Language eng
Formatted abstract
We re-evaluate the cross-sectional asset pricing implications of the recursive utility function of Epstein and Zin (1989, 1991), using innovations in future consumption growth in our tests. Our empirical specification helps explain the size, value and momentum effects. Specifically, we find that (i{cyrillic, ukrainian}) the beta associated with news about consumption growth has a systematic pattern: beta decreases along the size dimension and increases along the book-to-market and momentum dimensions, (i{cyrillic, ukrainian}i{cyrillic, ukrainian}) innovation in consumption growth is significantly priced in asset returns using both the Fama and MacBeth (1973) and the stochastic discount factor approaches, and (i{cyrillic, ukrainian}i{cyrillic, ukrainian}i{cyrillic, ukrainian}) the model performs better than both the CAPM and Fama-French model.
Keyword Consumption based asset pricing model
Epstein and Zin’s recursive utility function
Economic tracking portfolio
Q-Index Code C1
Q-Index Status Confirmed Code
Institutional Status UQ

Document type: Journal Article
Sub-type: Article (original research)
Collections: Official 2014 Collection
UQ Business School Publications
 
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Created: Wed, 30 Oct 2013, 14:14:32 EST by Karen Morgan on behalf of UQ Business School