Review of Financial Studies Vol. 22 No. 3 2009
Cointegration and Consumption Risks in Asset Returns
Abstract
[We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long-run consumption risks. We show that the return betas, derived from the cointegration-based VAR (EC-VAR) model, successfully account for the cross-sectional variation in equity returns at both short and long horizons; however, this is not the case when the cointegrating restriction is ignored. Our evidence highlights the importance of cointegration-based long-run consumption risks for financial markets.]
- Volume
- 22
- Issue
- 3
- Pages
- 1343-1375
- Sources
- bibtex:phds-export.bib