Asset pricing without garbage

Kroencke, Tim A.

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URL:	https://ub-madoc.bib.uni-mannheim.de/34772
URN:	urn:nbn:de:bsz:180-madoc-347722
Document Type:	Working paper
Year of publication:	2013
The title of a journal, publication series:	ZEW Discussion Papers
Volume:	13-071
Place of publication:	Mannheim
Publication language:	English
Institution:	Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
MADOC publication series:	Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject:	330 Economics
Classification:	JEL: G12,
Keywords (English):	Consumption-based asset pricing , garbage , filtering
Abstract:	This paper provides an explanation why garbage as a measure of consumption implies a several times lower coefficient of relative risk aversion in the consumption-based asset pricing model than consumption based on the official National Income and Product Ac- counts (NIPA): Unlike garbage, NIPA consumption is filtered to mitigate measurement error. I apply a structural model of the filtering process, which allows to revoke the filter inherent in NIPA consumption. "Unfiltered NIPA consumption" performs as well as garbage in explaining the equity premium and risk-free rate puzzle. Furthermore, I find that two other popular NIPA-based measures, three-year and fourth-quarter NIPA consumption, are related to unfiltered NIPA consumption. Both can be viewed as ad hoc unfilter rules.

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