Cyclical dynamics in idiosyncratic consumption risk

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.

Name thesis:degree_name

Master

Department dc:contributor.department

Sloan School of Management

Grantor dc:publisher

Massachusetts Institute of Technology

Year dc:date.issued

2020

Author dc:creator

• Cole, Allison(Business management scientist) (Allison Taylor)Massachusetts Institute of Technology.

Advisor dc:contributor.advisor

• Jonathan A. Parker.

• Sloan School of Management.

Statement dc:rights

• MIT theses may be protected by copyright. Please reuse MIT thesis content according to the MIT Libraries Permissions Policy, which is available through the URL provided.

Licence dc:rights.uri

• http://dspace.mit.edu/handle/1721.1/7582

Language dc:language.iso

eng

Handle dc:identifier.uri

https://hdl.handle.net/1721.1/126973

OAI identifier oai:identifier

oai:dspace.mit.edu:1721.1/126973