This paper investigates the importance of idiosyncratic consumption risk for the cross-sectional variation in average returns on stocks and bonds. If idiosyncratic consumption risk is not priced, the only pricing factor in a multiperiod economy is the rate of aggregate consumption growth. We o®er evidence that the cross-sectional variance of consumption growth is also a priced factor. This demo...

The CAPM is still considered a first-order intellectual achievement, in spite of the current thought leaders also describing it as being “empirically vacuous” (Fama and French, 2006) or that “having a low, middle or high beta does not matter; the expected return is the same” (Ross, 1993).1 In­ deed, I would say the situation is worse, as volatility and beta are generally negatively correlated w...

This paper proposes a high dimensional factor multivariate stochastic volatility (SVOL) model in which factor covariance matrices are driven by Wishart random processes. The framework allows for unrestricted specification of intertemporal sensitivities, which can capture the persistence in volatilities, kurtosis in returns, as well as correlation breakdowns and contagion effects in volatilities...

We derive new bounds and distance measures for stochastic discount factors (SDFs) that generalize the original variance bounds and distance of Hansen and Jagannathan (1991, 1997) and higher moment bounds of Snow (1991). These generalized measures are suitable to analyze nonlinearities in asset pricing models and trading strategies. They imply nonlinear admissible SDFs that provide a more robust...

When consumption betas of stocks are computed using year-over-year consumption growth based upon the fourth quarter, the consumption-based asset pricing model (CCAPM) explains the cross-section of stock returns as well as the Fama and French (1993) three-factor model. The CCAPM's performance deteriorates substantially when consumption growth is measured based upon other quarters. For the CCAPM ...