Consumption Risk, Stock Returns, and Economic Cycles

We decompose the standard consumption beta into two components that measure consumption risk in high and low economic activity states. Recessionary consumption risk commands a positive and statistically significant compensation, while the market price of expansionary consumption risk is not robust. The two-beta model explains well the cross-section of excess returns on book-to-market, size, and momentum sorted portfolios, and substantially outperforms the traditional one-beta model. The results hold through for various business cycle classifications and alternative consumption measures