Get access

Asset Pricing with Garbage



    Search for more papers by this author
    • Savov is with the University of Chicago Booth School of Business. I am especially grateful to John Cochrane and Pietro Veronesi, as well as to Editor Campbell Harvey, and an anonymous referee and associate editor. I thank Shelly Schneider from Franklin Associates for providing the data. I also thank George Constantinides, Douglas Diamond, Robert Dittmar, John Heaton, and participants in the 2008 WFA Annual Meetings and the Chicago Booth Student Brownbag. I received support from the Center for Research in Security Prices. An Internet Appendix is available at


A new measure of consumption, garbage, is more volatile and more correlated with stocks than the canonical measure, National Income and Product Accounts (NIPA) consumption expenditure. A garbage-based consumption capital asset pricing model matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium-risk-free rate puzzle. These results carry through to European data. In a cross-section of size, value, and industry portfolios, garbage growth is priced and drives out NIPA expenditure growth.