Household Production and Asset Prices

We empirically examine the asset pricing implications of the Beckerian framework of household production, where utility is derived from both market consumption and home produced goods. We propose residential electricity usage as a real-time proxy for the service flow from household capital, as electricity is used in most modern-day household production activities and it cannot be easily stored. Using U.S. residential electricity usage from 1955 to 2012, our model based on household production explains the equity premium and the cross section of expected stock returns (including those of industry portfolios) with an R of 71%. ∗Da, [email protected], Finance Department, Mendoza College of Business, University of Notre Dame, Notre Dame, IN 46556; Yang, [email protected], Kelley School of Business, Indiana University, Bloomington, IN 47405; Yun, [email protected], Broad College of Business, Michigan State University, East Lansing, MI 48824. We thank Long Chen, Tom Cosimano, Jerome Detemple (the Editor), Bjorn Eraker, Wayne Ferson, Jeff Harris, Ravi Jagannathan, Raymond Kan, Pedro Matos, Bill McDonald, Stavros Panageas, Jesper Rangvid, Mark Ready, Marco Rossi, Alexi Savov, Tom Smith, Andreas Stathopoulos, Yuri Tserlukevich, Harald Uhlig, Raman Uppal, Annette Vissing-Jorgensen, Jason Wei, John Wei, Youchang Wu, Motohiro Yogo, Xiaoyan Zhang, two anonymous referees, and seminar participants at CKGSB, University of Toronto, and 2012 HKUST Finance Symposium on Investments/Asset Pricing for helpful comments. We thank Manisha Goswami, Steve Hayes, Dongyoup Lee, and Liang Tan for data and programming support. We thank Ken French for making the data available.