Cyclical dynamics in idiosyncratic consumption risk
Author(s)
Cole, Allison(Business management scientist) (Allison Taylor)Massachusetts Institute of Technology.
Download1191221879-MIT.pdf (1.579Mb)
Other Contributors
Sloan School of Management.
Advisor
Jonathan A. Parker.
Terms of use
Metadata
Show full item recordAbstract
This paper examines cyclical dynamics of idiosyncratic consumption risk using consumption data from the Nielsen Consumer Panel and the Panel Study of Dynamic Income. With GMM estimates and supplemental graphical analysis, I show that the idiosyncratic risk in consumption is i) highly persistent, with an autocorrelation coefficient near unity ii) strongly countercyclical, with the conditional variance rising by an average of 25 percent from peak to trough. Compared to previous findings on income dynamics, I show that the variance of idiosyncratic consumption risk is also countercyclical, but less so. Moreover, I do not find that consumption risk displays procyclical skewness, as has been shown with income risk. Furthermore, in a simple asset-pricing framework, the estimated countercyclical cross-sectional variance of consumption raises the equity premium by 4.1 percent from the representative-agent case, using a risk aversion of only 10-15.
Description
Thesis: S.M. in Management Research, Massachusetts Institute of Technology, Sloan School of Management, May, 2020 Cataloged from the official PDF of thesis. Includes bibliographical references (pages 51-56).
Date issued
2020Department
Sloan School of ManagementPublisher
Massachusetts Institute of Technology
Keywords
Sloan School of Management.