Consumption Volatility Risk




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    • Oliver Boguth is with the W. P. Carey School of Business at Arizona State University. Lars-Alexander Kuehn is with the Tepper School of Business at Carnegie Mellon University. We thank Murray Carlson; Alexander David; Wayne Ferson; Adlai Fisher; Lorenzo Garlappi; Cam Harvey; Burton Hollifield; Lars Lochstoer; Monika Piazzesi; Lukas Schmid; Amir Yaron; Motohiro Yogo; Lu Zhang; seminar participants at Berkeley, Carnegie Mellon University, University of British Columbia, and Wharton; as well as conference participants at the 2009 Annual Meetings of the Western Finance Association, European Finance Association, and Northern Finance Association, the 2009 North American Summer Meetings of the Econometric Society, the 2009 Centre for Economic Policy Research Gerzensee Summer Symposium on Financial Markets, and the 2010 Annual Meeting of the American Economics Association for valuable comments. We also thank Kenneth French for providing data on his website.


We show that time variation in macroeconomic uncertainty affects asset prices. Consumption volatility is a negatively priced source of risk for a wide variety of test portfolios. At the firm level, exposure to consumption volatility risk predicts future returns, generating a spread across quintile portfolios in excess of 7% annually. This premium is explained by cross-sectional differences in the sensitivity of dividend volatility to consumption volatility. Stocks with volatile cash flows in uncertain aggregate times require higher expected returns.