Idiosyncratic risk and the equity premium: Evidence from the consumer expenditure survey

Timothy Cogley

    Research output: Contribution to journalArticle

    Abstract

    This paper investigates whether uninsured idiosyncratic risk accounts for the equity premium. Following Mankiw (J. Financial Econ. 17 (1986) 211), the paper develops an equilibrium factor model in which risk premia depend on the covariance between an asset's return and certain moments of the cross-sectional distribution for consumption growth. Cross-sectional consumption factors are constructed using data from the Consumer Expenditure Survey, but they do not appear to be promising candidates for explaining the equity premium. The cross-sectional factors are weakly correlated with stock returns and generate equity premia of 2 percent or less for preference specifications with low degrees of risk aversion.

    Original languageEnglish (US)
    Pages (from-to)309-334
    Number of pages26
    JournalJournal of Monetary Economics
    Volume49
    Issue number2
    DOIs
    StatePublished - 2002

    Fingerprint

    Consumer expenditure
    Equity premium
    Factors
    Idiosyncratic risk
    Risk aversion
    Equity
    Consumption growth
    Risk premia
    Asset returns
    Stock returns

    Keywords

    • Asset pricing

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

    Cite this

    Idiosyncratic risk and the equity premium : Evidence from the consumer expenditure survey. / Cogley, Timothy.

    In: Journal of Monetary Economics, Vol. 49, No. 2, 2002, p. 309-334.

    Research output: Contribution to journalArticle

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