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Motivation & Methods

Paper Discussion: Consumption, Population, and the Cross-Section of Stock Returns Tzuling Lin, Richard MacMinn, and Larry Y. Tzeng 2009 Discussed by Jingjing Chai Goethe University, Frankfurt, Germany September, 2009, NYC. Motivation & Methods.

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Motivation & Methods

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  1. Paper Discussion: Consumption, Population, and the Cross-Section of Stock ReturnsTzuling Lin, Richard MacMinn, and Larry Y. Tzeng 2009Discussed by Jingjing ChaiGoethe University, Frankfurt, GermanySeptember, 2009, NYC

  2. Motivation & Methods Motivation: CCAPMCPCAPM: linking asset prices to the consumption and population/demographic Theory/Model: (1) CCAPM: Individuals are identical in all respects CPCAPM: (2) (3) Data & empirical analysis: as used in paper Jagannathan, Ravi, and Yong Wang, 2007, Lazy investors, discretionary consumption, and the cross-section of stock returns, Journal of Finance 62, 1623-1662.

  3. Contribution & Conclusion • CPCAPM explains the excess return better than CCAPM used by Jagannathan and Wang, 2007 in JF as well as Fama and French three-factor model (w.r.t. insignificant intercept term and higher R2); • CPCAPM implies highly population/consumption risk-averse individuals and can not help resolve the equity premium puzzle.

  4. Review & Question & To Do • Utility function: • Time discount factor in utility function und SDF is missing; • Incorporating the riskless rate in the pricing kernel isn’t necessary; • Consumption risk/beta and risk-premium for consumption are positive; but how could the risk-premium for population and RRA of population be (significantly) negative? Economical explanation? • An example: • N=200; c=1C=output=200; • N=100; c=1C=output=100; • N=200; c=0.5C=output=100; All individuals are identical and have the same consumption nothing changed  expc. excess return should be the same? Lower consumption  expc. excess return should be different?

  5. Review & Question & To Do

  6. Review & Question & To Do • Alternative to consider the population factor: • Utility of a representative agent only over average consumption per capita, but per capita consumption constructed by age structure adjustment. • Constructing a “new” RA:

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