We thank C. R. Narayanaswamy, Motohiro Yogo, an anonymous referee, and seminar participants at the Federal Reserve Board, University of North Carolina at Greensboro, 2011 FMA annual meeting, and the 2012 EFMA meeting for their helpful comments. We also thank Miles Berg for excellent research assistance. The views expressed in this article are those of the authors and do not represent those of the Federal Reserve System or the Board of Governors.
CONSUMPTION, MONEY, INTRATEMPORAL SUBSTITUTION, AND CROSS-SECTIONAL ASSET RETURNS†
Version of Record online: 19 MAR 2013
© 2013 The Southern Finance Association and the Southwestern Finance Association
Journal of Financial Research
Volume 36, Issue 1, pages 115–146, Spring 2013
How to Cite
Gu, L. and Huang, D. (2013), CONSUMPTION, MONEY, INTRATEMPORAL SUBSTITUTION, AND CROSS-SECTIONAL ASSET RETURNS. Journal of Financial Research, 36: 115–146. doi: 10.1111/j.1475-6803.2013.12005.x
- Issue online: 19 MAR 2013
- Version of Record online: 19 MAR 2013
When utility is specified recursively as a function of both consumption and money, real money growth becomes a common factor in addition to the market excess return and consumption growth. The risk premium on the money factor is negative because money complements consumption and is positively related to the stochastic discount factor. Growth portfolios, short-term loser portfolios, and long-term winner portfolios tend to have higher loadings on the money factor and, thus, earn lower premiums on money.