Leisure, Consumption and Long Run Risk: An Empirical Evaluation

Posted: 29 Mar 2013

See all articles by Xiang Zhang

Xiang Zhang

School of Finance/Institute of Big Data, Southwestern University of Finance and Economics; Southwestern University of Finance and Economics

Date Written: March 12, 2013

Abstract

I study a long-run risk model with non-separable leisure and consumption in the Epstein-Zin preferences to price a cross-section of equity returns over 1948-2011 for the US market. The stochastic discount factor is shown by news on both leisure and consumption. While estimating these two long run factors using a vector auto-regression (VAR), I find that growth (big) stocks - lower average returns - obtain higher long run leisure betas but lower long run consumption betas than value (small) stocks do. Here leisure acts as an 'insurance' and decreases the price of long run risk. Expected returns on stocks that highly comoves with future leisure will be less because of future investment opportunities. Moreover, expected cash flows are small if there is good news on leisure. The data fact evidences that leisure absorbs more than 60.2% foregone work hours, but less than 2% for searching jobs. When job creation flows hampers for the marginal costs of hiring fails to decline fast, the rate at a vacancy is filled decreases, therefore expected cash flows become even smaller as productivity falls and wages are inelastic.

Keywords: Epstein–Zin Utility, Long Run Risk, Leisure, Value-Growth Portfolios, Small-Big Portfolios, Vector Auto-regression

JEL Classification: G12, G17, N22

Suggested Citation

Zhang, Xiang, Leisure, Consumption and Long Run Risk: An Empirical Evaluation (March 12, 2013). Available at SSRN: https://ssrn.com/abstract=2240482 or http://dx.doi.org/10.2139/ssrn.2240482

Xiang Zhang (Contact Author)

School of Finance/Institute of Big Data, Southwestern University of Finance and Economics ( email )

No. 555 Liu Tai Da Dao Ave.
Chengdu, Sichuan 610000
China

Southwestern University of Finance and Economics ( email )

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