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Lazy Investors, Discretionary Consumption, and the Cross-Section of Stock Returns




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    • Jagannathan is at the Kellogg School of Management, Northwestern University and the National Bureau of Economic Research; Wang is at the School of Accounting and Finance, Hong Kong Polytechnic University. We thank Douglas Breeden, John Cochrane, Zhi Da, Kent Daniel, Lars Hansen, John Heaton, Charlie Himmelberg, Martin Lettau, Deborah Lucas, Sydney Ludvigson, Monika Piazzesi, Ernst Schaumburg, Michael Sher, Annette Vissing-Jorgensen, Zhenyu Wang, Robert Stambaugh (editor), an anonymous referee, and seminar participants at the NBER Asset Pricing Meeting, University of Chicago, Cornell University, Duke/UNC Asset Pricing Conference, Federal Reserve Bank of New York, Rutgers University, University of Southern California, University of Virginia, and University of Wisconsin for helpful comments. We alone are responsible for all errors and omissions.


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 to hold at any given point in time, investors must make their consumption and investment decisions simultaneously at that point in time. We suspect that this is more likely to happen during the fourth quarter, given investors' tax year ends in December.