Output gap and consumption risk on the cross-section of stock returns in Korea
- Authors
- Lee, Byeung-Joo; Kwon, Ji Ho
- Issue Date
- Nov-2023
- Publisher
- ELSEVIER
- Keywords
- Consumption capital asset pricing model; Conditioning variable; Output gap; Future consumption growth
- Citation
- INTERNATIONAL REVIEW OF ECONOMICS & FINANCE, v.88, pp.1020 - 1034
- Journal Title
- INTERNATIONAL REVIEW OF ECONOMICS & FINANCE
- Volume
- 88
- Start Page
- 1020
- End Page
- 1034
- URI
- https://scholarworks.bwise.kr/gachon/handle/2020.sw.gachon/89057
- DOI
- 10.1016/j.iref.2023.07.031
- ISSN
- 1059-0560
- Abstract
- We examine if output gap can be the conditioning information for consumption-based asset pricing model in the Korean stock market. In an effort to empirically explain the cross-sectional variation of stock returns with economic equilibrium model, our conditioning variable, output gap, enables consumption capital asset pricing model (CCAPM) to explain a substantial variation in the cross-section of stock returns in Korea. In addition, the conditional version of CCAPM with output gap as a conditioning variable can explain the cross-section of stock returns about as well as the Fama-French three- and five-factor model when using future consumption growth. Asset's riskiness is determined by the correlation with consumption growth conditional on the business cycle measured by the output gap. (JEL G12).
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