Mathematical Finance Seminar
March 13, 2003 , 5:30 PM to 7:00 PM
Gregg Duffee, UC Berkeley
Time-variation in the covariance between stock returns and consumption growth
Abstract:
I present a new method to test whether variations over time in expected
aggregate stock returns are related to variations in the
conditional covariance between stock returns and
aggregate consumption growth. I find substantial evidence of
time-variation in this covariance. This conditional covariance is
strongly negatively associated with expected stock returns, in
contrast to the simple intuition of consumption-based asset pricing models.
This result is not simply an artifact of time-variation in stock
return volatility; conditional correlations as well as conditional
covariances vary inversely with expected stock returns. I discuss
some potential explanations for this pattern.