Pricing innovations in consumption growth: a re-evaluation of the recursive utility model

Xiao, Yuchao, Faff, Robert, Gharghori, Philip and Min, Byoung-Kyu 2013, Pricing innovations in consumption growth: a re-evaluation of the recursive utility model, Journal of banking and finance, vol. 37, no. 11, pp. 4465-4475, doi: 10.1016/j.jbankfin.2012.08.015.

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Title Pricing innovations in consumption growth: a re-evaluation of the recursive utility model
Author(s) Xiao, Yuchao
Faff, Robert
Gharghori, Philip
Min, Byoung-Kyu
Journal name Journal of banking and finance
Volume number 37
Issue number 11
Start page 4465
End page 4475
Total pages 11
Publisher Elsevier BV
Place of publication Amsterdam, The Netherlands
Publication date 2013
ISSN 0378-4266
Keyword(s) consumption based asset pricing model
Epstein and Zin’s recursive utility function
economic tracking portfolio
Summary We re-evaluate the cross-sectional asset pricing implications of the recursive utility function of Epstein and Zin, 1989 and Epstein and Zin, 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 (і) 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, (іі) innovation in consumption growth is significantly priced in asset returns using both the Fama and MacBeth (1973) and the stochastic discount factor approaches, and (ііі) the model performs better than both the CAPM and Fama–French model.
Language eng
DOI 10.1016/j.jbankfin.2012.08.015
Field of Research 159999 Commerce, Management, Tourism and Services not elsewhere classified
Socio Economic Objective 970115 Expanding Knowledge in Commerce, Management, Tourism and Services
HERDC Research category C1.1 Refereed article in a scholarly journal
Copyright notice ©2013, Elsevier
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Document type: Journal Article
Collections: Deakin Graduate School of Business
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