We investigate the empirical implications of the investment-based model of asset pricing for the Hansen-Jagannathan and Kozak-Nagel-Santosh discount factors in the linear span of equity returns. Our methodology is based on the equivalence between investment and equity returns implied by the...

This paper proposes a new method to form basis assets with which to represent investors' opportunity sets and evaluate the goodness-of-fit of asset pricing models. We use return correlations to form a measure of distance between securities, as in Ormerod and Mounfield (2000), and use this...

In this paper, we model cash flow and consumption growth rates as a vector-autoregression (VAR), from which we measure the response of cash flow growth to consumption shocks. As the appropriate cash flow proxy is not unambiguous, nor likely to be measured without error, we consider three...

A central economic idea is that an asset's risk premium is determined by its ability to insure against fluctuations in consumption (i.e., by the consumption beta). Cross-sectional differences in consumption betas mirror differences in the exposure of the asset's dividends to aggregate...

In this paper, we assess the profitability of momentum trading strategies using a stochastic discount factor approach. We estimate the stochastic discount factor from a set of basis assets, assuming that the law of one price (or, alternatively, no-arbitrage) holds, and simultaneously assess the...

Firm-level risk exposures and costs of equity are notoriously difficult to estimate. Using a novel approach mapping consumption risk exposures to firm characteristics, we combine the traditional portfolio-level approach to testing asset pricing models with firm-level information to measure...

We propose a novel approach to measuring firm-level risk exposures and costs of equity. Using a simple consumption-based asset pricing model that explains nearly two-thirds of the variation in average returns across 55 portfolios, we map the relation between exposures to consumption risk and...

We argue that the cointegrating relation between dividends and consumption, a measure of long-run consumption risks, is a key determinant of risk premia at all investment horizons. As the investment horizon increases, transitory risks disappear, and the asset's beta is dominated by long-run...

This paper theoretically explores the characteristics underpinning quadratic term structure models (QTSMs), which designate the yield on a bond as a quadratic function of underlying state variables. We develop a comprehensive QTSM, which is maximally flexible and thus encompasses the features of...

We argue that investor concerns about the exposure of asset returns to permanent movements in consumption levels are a key determinant of the risk and return relation in asset markets. We show that as the investment horizon increases, (i) the return's systematic risk exposure (consumption beta)...