Svetlana Bryzgalova

Svetlana Bryzgalova, London Business School

Consumption in Asset Returns

Abstract:
Consumption dynamics are hard to measure accurately in the data, yet they are the crucial ingredient of macro-finance asset pricing models. The central insight of these models is that, in equilibrium, both consumption and returns are largely driven by the same fundamental shocks. Therefore, we use the information in returns to identify the underlying process of consumption. We find that aggregate consumption growth reacts over multiple quarters to the innovations spanned by bond and stock returns. This persistent component: (a) is economically large i.e. it accounts for about 26% of the total variation in consumption; (b) drives most of the time series variation of stocks and a significant (yet small) fraction of bond returns; (c) is reflected in the term structure of interest rates; and (d) is priced jointly in the cross-sections of bond and stock returns. These results, stable across estimation techniques and robustness checks, pose a novel challenge for asset pricing theory.

Bio:
Svetlana Bryzgalova research interests cover financial econometrics, empirical asset pricing and macrofinance. She was previously an Assistant Professor of Finance at Stanford Graduate School of Business. She has a PhD in Economics from London School of Economics and Political Science (LSE) and an MRes in Economics, also from LSE.