Paper Discussion: Consumption, Population, and the Cross-Section of Stock

ReturnsTzuling Lin, Richard MacMinn, and Larry Y. Tzeng 2009

Discussed by Jingjing ChaiGoethe University, Frankfurt, Germany

September, 2009, NYC

Motivation & MethodsMotivation: CCAPMCPCAPM: 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.

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economy in then consumptio aggregate :sss cNC

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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.

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: 1. N=200; c=1C=output=200;

2. N=100; c=1C=output=100;

3. N=200; c=0.5C=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?

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Review & Question & To Do

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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