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Publications [#42548] of Dana Kiku

Working Papers

  1. with Ravi Bansal and Robert Dittmar, Cointegration and Consumption Risks in Asset Returns (March, 2006)
    (last updated on 2006/07/12)

    Abstract:

    In this paper, we argue that long run movement in consumption is a key determinant of the risk-return relation in asset markets. Our goal is to explain cross-sectional differences in risk premia by horizon. We show that as the investment horizon increases, the return's consumption beta is dominated by the long-run (cointegrating) relation between dividends and consumption. Further, as cointegration alters dividend growth and return predictability, it has important conceptual and empirical implications for the risk-return tradeoff at all investment horizons. We show that asset betas, derived from an Error-Correction VAR model of returns, can successfully account for the cross-sectional variation in equity mean returns at both short and long horizons; this is not the case when the cointegrating restriction is ignored. In all, our evidence underscores the economic importance of cointegration and risks related to long run movements in consumption for understanding the whole term structure of the risk-return tradeoff in the cross-section of assets.

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