Publications [#26728] of Edward H. Fang

Working Papers

1. E.H. Fang, Time-varying Expected Consumption Growth and Cross-sectional Equity Returns (October, 2004) [pdf]
   (last updated on 2004/10/14)

   Abstract:
   This paper explains cross-sectional stock return patterns with a consumption-based intertemporal asset-pricing model by allowing for time-varying expected consumption growth under non-expected utility. The predictability in the consumption growth together with the recursive nature of the utility makes the long-term expected growth news a new risk factor. The expected growth news is identified through a VAR specification of the consumption growth with a set of information variables commonly used for forecasting business cycles. Under this specification, strong empirical support is found for long-term consumption growth predictability. The model does a superb job in fitting cross- sectional return patterns. In particular, the model explains the size and book-to-market effects better than a host of benchmark models, which suggests that the size and book-to-market effects are consistent with risks associated with long-run consumption growth opportunities. The model also provides a structural link between the macroeconomic news and the systematic risks in the financial market through restrictions implied by the consumption growth predictability. Findings in this paper suggest that the aggregate cash flow dynamics is an important aspect for intertemporal asset pricing.