Procyclicality of the comovement between dividend growth and consumption growth

• 成果类型: Article
• 署名作者: Xu, Nancy R.
• 署名单位: Boston College
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/j.jfineco.2020.07.013
• 发表日期: 2021
• 页码: 288-312
• 关键词: Duffee Puzzle; Procyclical amount of consumption risk; Dividend-consumption comovement; habit formation; equity premium

摘要

Duffee (2005) shows that the amount of consumption risk (i.e., the conditional covariance between market returns and consumption growth) is procyclical. In light of this Duffee Puzzle, I empirically demonstrate that the conditional covariance between dividend growth (i.e., the immediate cash flow part of market returns) and consumption growth is (1) procyclical and (2) a consistent source of procyclicality in the puzzle. Moreover, I solve an external habit formation model that incorporates realistic joint dynamics of dividend growth and consumption growth. The procyclical dividend-consumption comovement entails two new procyclical terms in the amount of consumption risk via cash flow and valuation channels, respectively. These two procyclical terms play an important role in generating a realistic magnitude of consumption risk. In contrast to extant habit formation models, the conditional equity premium no longer increases monotonically when a negative consumption shock arrives because it might lower the amount of risk while increasing the price of risk. (C) 2020 Elsevier B.V. All rights reserved.