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open access
Embargoed until 2016-04-30
Copyright: Singh, Mandeep
Embargoed until 2016-04-30
Copyright: Singh, Mandeep
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Abstract
Classical consumption-based asset pricing models typically imply the
existence of only one common factor in household consumption growth
|aggregate consumption growth. This study examines whether there
are multiple common factors in household consumption growth using
a novel dataset and methodology. We find that i) there is a significant
cross-sectional variation in household consumption growth, and
ii) the cross-sectional variation is partially explained by exposure to
multiple common factors orthogonal to aggregate consumption growth.
Further, household exposure to the most pervasive common factor after
aggregate consumption growth is related to the amount of human
capital such as labor income, education and age, and their ability to
hedge idiosyncratic shocks using borrowing collateral such as the housing
wealth and liquid investments. This suggests that the source of
additional common factors in consumption is related to an incomplete
market for consumption insurance of households.