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Empirical Evaluation*

Xiang Zhang

March 12th, 2013, The Second Version

Abstract

I study a long-run risk model with non-separable leisure and consumption in the EpsteinZin preferences to price a cross-section of equity returns over 19482011 for the US market. The stochastic discount factor is shown as 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

negative lower long run leisure betas and 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 low 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: EpsteinZin Utility, Long Run Risk, Leisure, Value-Growth Portfolios, Small-Big Portfolios, Vector Auto-regression

* I thank seminar participants at Centre for Finance in University of Gothenburg, International 2012 Paris Finance Meeting, SAEe2012, Institute of Financial Studies, RIEM in

SWUFE and Arne Ryde Workshop as well as Abhay Abhyankar, Jordi Caball, Michael Creel,

Francisco Pearanda, Phil Dybvig, Mark Loewenstein, Michael Brennan, Albert Marcet, Hossein Asgharian, Marvin Goodfriend, Tan Wang and Harald Uhlig for valuable comments and

suggestions. I gratefully acknowledge financial support from the Spanish Ministry of Science

and Innovation through grant ECO2008-04756 (Grupo Consolidado-C) and FEDER.

IDEA, Departament dEconomia i dHistria Econmica, Universitat Autnoma de

Barcelona, 08193, Bellaterra (Barcelona), Spain. Email: Zhang.Xiang@uab.es

Introduction

An explosion of research on long run risk asset pricing has been brought

forth as a leading contender for explaining aggregate stock market behavior. Bansal and Yaron (2005) find that a highly persistent consumption process is the essence for the long run risk to explain equity premiums. However, leisure time brings the direct utility (satisfaction) and influences the

marginal utility. Directly leisure data shows a high correlation with asset returns and more persistence. Thus introducing leisure into the long

run model leads to nontrivial interaction between consumption and leisure

choice, and influences the stochastic discount factor (SDF).

This paper investigates the relation between long run leisure, consumption, and cross-sectional asset returns. I study the non-separable leisure and

consumption EpsteinZin (EZ) utility, with which the representative agent

makes consumption and leisure decision intertemporally. This feature leads

the pricing kernel to be presented by news both on leisure and consumption, and empirically it improves the models performance with respect to

the standard models failures to explain cross-sectional equity premiums.

After log-linearising the Euler equations, the derived news on leisure

and consumption are estimated via a VAR. I empirically find that growth

(big) stocks, which demand a smaller reward, bear negative long run leisure

betas and less long run consumption betas than value (small) stocks do. The

leisure time forecasts stock market returns with a significantly negative

slope. Besides, news on leisure and consumption significantly price their

long run risks on cross-sectional returns. My model improves the performance of the standard consumption-based CAPM, the durable consumption

model and FamaFrench three-factor models cross a variety of criteria.

The paper finds the long run leisure and consumption, when combined,

are capable to explain cross-sectional equity premiums. The direct channel

is from the intertemporal Euler equation (SDF). The value of an asset decreases because investors may receive bad news about future consumption

growth, but it may also fall because investors obtain good news on leisure.

While the consumption growth falls, the leisure time increases acting as a

hedge that decreases the price of long run risk. Hence, the long run leisure

risk bears relatively smaller risk premiums. Expected returns on stocks with

the predominated long run leisure risk will be discounted more today; relatively less risky stocks will be asked for less compensation today because of

possible future compensation which comes from the future investment opportunities.

The indirect channel comes from the labor market, and positive news

on leisure leads to smaller expected cash flows. Leisure is defined as the

difference between a fixed time endowment and the observable hours spent

2

The data fact evidences that during the recession the foregone market hours

are spent in a waste instead of looking for jobs, building skills and engaging

in activities they previously might have paid someone else to do, like cooking

meals, cleaning or fixing up the house1 . Imperfectly the leisure acts as an

indicator for the congestion in the labor market2 . Consider a large negative

shock hitting the economy, the leisure time increases and the congestion in

the labor market become serious. While the unemployment rate increases,

the rate at a vacancy is filled decreases, because job creation flows hampers

for the marginal costs of hiring fails to decline fast in recessions3 . As the

marginal costs of hiring fail to decline to shrink profits, the cash flows become even smaller while productivity falls. Furthermore, since wages are

inelastic, reducing on profits becomes even further, the incentives of hiring

are suppressed and job creation flows stifled.

A great deal of the related literature has been drawn on. Eichenbaum

et al. (1988) explore the empirical properties of representative agent models

with intertemporal consumption and leisure choice in a power utility. My

paper contributes long run risks on non-separable consumption and leisure

in EZ preference, and does not need to assume any process that the current

consumption or leisure depends on the lagged consumption or leisure. I build

the framework on earlier work of Uhlig (2007) but with different objectives

to study. Based on the specific form of Uhlig model with the mean utility

shift, this paper presents news on both consumption and leisure for their

effects to price cross-sectional equity returns.

My paper uses the similar leisure data to Yang (2010), and extends it to

2011. Yang finds that leisure data is persistent and time-varying volatile,

so assumes that consumption and leisure follow discrete-time CIR processes

therefore incorporating leisure contributes to more than 75% of equity premium in the model. Unlike Yang, I combine adjusted working hours to the

leisure measure. Since Francis and Ramey (2009) point that there is a demographic effect in the working hours which gives conflicting results on the

1 Aguiar et al. (2012) find that no more than 2% of the foregone market work hours are al-

located to job search, but leisure absorbs roughly 50%, with sleeping and television watching

accounting for most of the increased leisure during the recession. Burda and Hamermesh

(2010) find that lower market work among the unemployed does not represent increased

household production.

2 Appendix shows a high correlation between leisure time and the unemployment rate (seasonally adjusted U-3 unemployment rate tracked by the Bureau of Labor Statistics). Aguiar

et al. (2012) shows that 61% of foregone work hours are accounted by the increase in the

proportion of unemployed in the population, 13% by the decrease in labor force participation,

and 26% by the decline in market work hours per employed person.

3 Though the marginal costs of hiring can rise rapidly in expansions, they decline slowly

in recessions (Mortensen and Nagypl (2007) and Pissarides (2009)). Hence, the fixed costs

restrict the marginal costs from declining fast in recessions, but hampering job creation flows.

studies the leisure effect in the pricing kernel instead of the long-run relations between real wage, labor and consumption4 . Because the wage impact

on both leisure and market work is empirically indeterminate5 .

In the rest of the present paper, I first evidence some stylized facts from

the data in Section 2. Section 3 introduces the basic model and derives the

SDF. Section 4 specifies the estimation method and describes the data. In

Section 5, I show the empirical results. Section 6 concludes.

2

2.1

Stylized Facts

Leisure and Consumption

Figure 2 shows the average weekly leisure, which takes into account demographic and sectoral movements6 . On average, the amount of leisure is about

44 hours per week and strongly counter-cyclical. Non-durable consumption

and services is shown in Figure 3. Unlike leisure hours, consumption is

strongly cyclical. Meanwhile, leisure growth exhibits large oscillations during the pre-WWII period, but stays relatively tranquil during the post-war

period in Figure 4. The leisure growth stays low most of time, but it becomes

large occasionally, especially after the financial crisis period of 2007. The

volatility of leisure growth is about 27.96% (35.22% and 27.04% for demographic, productivity and Tornqvist adjusted measures).

Panel A in Table 1 reports the significant first order autocorrelations of

leisure as 0.38. As in Bansal and Yaron (2005), the variance ratio test is

performed on both its log and realized volatility of innovations. Panel B

reports the variance ratio test for leisure. If it is an i.i.d., then the ratio

should be equal to 1, but the ratio for leisure is higher than unity implies that

a positive autocorrelation dominates. Panel C investigates the time-varying

volatility of leisure, since it shows that the adjusted variance ratios are all

below unity, which, together with the decreasing variance ratios, provides

evidence of a negative serial correlation in the realized volatility. Panel D

explores the predictive relations between the realized growth and the price

dividend ratio. The results indicate that realized leisure growth in the future

4 Dittmar and Palomino (2010) study the link between labor income and leisure was provided by the marginal rate of substitution between consumption and leisure.

5 Empirical work by Bloch and Gronau using United States and Israeli data suggests that

leisure among couples is positively related to the husbands wage income, negatively related

to the wifes wage income, and positively related to non-wage income.

6 The activities with the highest enjoyment scores (sex, playing sports, etc.) are those that

one would generally classify as leisure (Figure 1 shows a survey reported in Robinson and

Godbey (1999)).

l,t+ j = a j + b j (p t d t ) + t+ j ,

(2.1)

with negative slopes. Conversely, log pricedividend ratios in the future are

also predicted by the realized leisure growth,

(p t+ j d t+ j ) = a j + b j l,t + t+ j ,

(2.2)

also with negative slopes. Both sets of results are statistically strong.

Table 2 presents the empirical properties for quarterly per capita nondurable consumption and services. Panel A reports a significant first order

autocorrelation of 0.28, which is close to that reported in Bansal and Yaron

(2005). Notably, the autocorrelations for leisure and consumption exhibit

patterns that are very similar both qualitatively and quantitatively. Panel B

and Panel C show that the short run consumption is close to a random walk,

but the volatility is time-varying when the time horizon increases. Panel

D provides further evidence for the positive predictive relations between the

realized consumption growth and the pricedividend ratio. These results are

similar to those reported in Bansal et al. (2005) for nondurable consumption

growth.

2.2

between leisure or consumption and asset returns

r t = c 1 + 1 r t1 + 2 r t2 + 1 g i,t1 + 2 g i,t2 + u r,t ,

where r t is the quarterly market excess return and g i,t is the quarterly

leisure or consumption growth rate at date t. I then conduct an F test of

the following null hypothesis: H0 : 1 = 2 = 0. Similarly, I estimate,

g i,t = c 2 + 1 g i,t1 + 2 g i,t2 + 1 r t1 + 2 r t2 + u i,t ,

and then conduct an F test of the null hypothesis H0 : 1 = 2 = 0. The

pvalue of the Granger causality test of consumption (leisure) Grangercausing returns is 0.2 (0.5), asset returns predict future consumption and

leisure growths.

I then calculate the correlation between leisure and asset returns over

different horizons in Figure 9, while the analysis of consumption is reported

in Figure 8. For instance, the correlation between cumulative consumption

growth and cumulative excess market returns,

corr(

k

X

g l,t+ j ,

j =1

k

X

j =1

r t+ j )

the stronger correlation over the long run, I perform a band-pass filtering

analysis (e.g., Baxter and King (1999)). The band-pass filter is used to extract the low-frequency and high-frequency components of leisure (consumption) and asset returns. For leisure data, lower frequencies have the higher

correlation with asset returns, the correlation is 0.42 for lower frequencies

and 0.17 for higher frequencies (with cycles between 2 and 12 quarters) for

quarterly data.

Because I focus on the long run (low frequency) relation between consumption, leisure and returns, the most convenient way to proceed is to use

bivariate spectral analysis in the right part of Figure 8 and Figure 9. To

be more specific, the coherence of the leisure or consumption growth rate

and stock market returns at frequency measures the correlation between

leisure or consumption and returns at frequency . When the frequency is

, the corresponding length of the cycle is 1/ quarters. To identify the sign

of the correlation, the cospectrum needs to be examined. The cospectrum

at frequency can be interpreted as the portion of the covariance between

consumption or leisure growth and asset returns that is attributable to cycles with frequency . The slope of the phase spectrum at any frequency is

the group delay at frequency and precisely measures the number of leads

or lags between leisure or consumption and asset returns. When this slope

is positive, leisure or consumption leads the market returns. The left panel

in the right part of Figure 9 plots the results for the quarterly data, while

the right panel for the annual data. Tthe coherence between the quarterly

leisure growth rate and quarterly excess market returns is much higher at

low frequencies than at high frequencies. Therefore, the comovement between leisure growth and asset market returns is much stronger at low frequencies.

The Model

3.1

utility function

1/(1)

Vt = U(C t , t L t ) + E t [(Vt+1 )1 ]

,

(3.1)

leisure and t is the long run trend at time t. is the subjective discount

rate, denotes the curvature of the EZ utility, , 6= 17 .

7 Note that, traditionally, EZ preferences over consumption and leisure streams have been

Ut =

(C t ( t L t )1 )1

1

(3.2)

in consumption results in an % drop in the consumption-leisure composite.

denotes the risk aversion on the temporal utility.

Hence, the preference function becomes

Vt =

(C t ( t L t )1 )1

1

1/(1)

+ E t [(Vt+1 )1 ]

.

(3.3)

the preference given by the above reduces to special case of expected utility. The main advantage of the recursive preference is that it allows for

greater flexibility in modeling risk aversion and the intertemporal elasticity

of substitution. In the recursive preference above, the intertemporal elasticity of substitution over deterministic consumption paths is exactly the same

as in the expected utility, but the households risk aversion with respect to

gambles can be amplified (or attenuated) by the additional parameter . Importantly, the intra-temporal CobbDouglas (CD) form can be treated as a

normalization of the preference function; shifting the intercept of the felicity

function, i.e., U(.), will not affect economic choices8 . Furthermore, the CD

form ensures the felicity function U(C, L) does not depend on for (C, L)

locally around (C, L, ) up to a second-order approximation9 .

Two cases are distinguished: treating consumption and leisure as a single composite good, or not. The households risk aversion to gambles can be

amplified (or attenuated) by the additional parameter as + (1 ) (consumption and leisure as a composite good). If non-separable consumption

and leisure (not a single composite commodity), the consumption-only coefficient of relative risk aversion (RRA) and intertemporal elasticity of substitution (IES) will depend on as + (1 ) and the inverse of 1 (1 )

10

.

written as

1e 1

Vt = [U(C t , L t )1 + (E t Vt1+e

]

1 )

e = V 1 and 1 = 1e .

but by setting V

1

8 see Uhlig (2007) Assumption 3.

9 Based on CD form and Uhlig (2007) Proposition 2, = /(1 )U.

10 Swanson (2012) has proofed that the risk aversion of the recursive preference is given by

R S (S; ) =

V11 (S; )

V1 (S; )

+

,

V1 (S; )

V (S; )

exogenous to the household and V stands for the value function.

C t + S t = R t S t1 + Wt N t ,

(3.4)

where S t is the wealth invested in some asset with a gross return (measured in consumption units) of R t from period t 1 to t, Wt is the real wage

and N t presents the labor supply. The standard pricing formula or the

stochastic discount factor (SDF) can be computed by the Euler equation with

respect to consumption,

t = E t [ t+1 R t+1 ],

(3.5)

where t is the Lagrange multiplier on the budget constraint.

This paper assumes log consumption is trend-stationary, e.g., the log consumption is equal to a linear trend K t and an AR(1) process t+1 + t , where

| | < 1. It is more convenient to restate the investment problem in terms of

the detrended variables

t

t =

,

(3.6)

t1

V

et = t ,

V

(3.7)

t

et = C t ,

C

(3.8)

t

St

.

(3.9)

Set =

t

The maximization of the problem can be rewritten as

maxV0 ,

(3.10)

subject to

et , L t ) + e E t [( t+1 / )1 (V

et = U(C

et+1 )1 ] 1/(1) ,

V

et + Set = R t Set1 + Wt N t ,

C

t

1

where e stands for

,

e t is the Lagrange multiplier for the

detrended V (.) function constraint, and

1

1

e 1 )] 1

E t1 [( t )1 (V

t

t

e

e

: t = t1

,

et

et

V

V

et , L t ),

e t U1 ( C

e t = (1 e)

:

et

C

e

t+1

e

e

: t = E t

R t+1 .

et

t+1

S

(3.11)

(3.12)

(3.13)

3.2

I demonstrate the mechanisms working in the model via approximate analytical solutions. Small letters are used to denote the log-linear deviation of a

e log(f

variable from its steady state, where c = log(C)

C), l = log(L) log(L),

e L)) log(U).

f

= log() log( ) and u = log(U(C,

The second order Taylor expansion of the felicity function U(.) yields

1

1

u c + l cc c2 + ( cl,l ) c l ( ll + 1 ) l 2 .

2

2

(3.14)

growth model such as CD production function, where wages times labor

equals the share of labor times output11 . The usual first order condition

with respect to leisure then shows to be the ratio of the expenditure shares

for consumption to leisure.

The V (.) function will be log-linearized to

e

v t = c t + l t + E t

t+1 + v t+1 ,

(3.15)

where =

V

1 V +

the benchmark expected discounted utility framework, and = 1 U.

Note

that = in the steady state path. The equation shows that v t can be

related back to the observables, i.e., to c t , l t , as well as t .

Equations (3.11), (3.12) and (3.13) log-linearize to

$ t $ t1 = (v t E t1 [v t ]) + (1 )( t E t1 [ t ]) + (1 )E t1 [ t ],

(3.16)

t $ t = 1 cc c t + ( cl,l )l t ,

(3.17)

(3.18)

where $ denotes the log Lagrange multiplier for the detrended V (.) function constraint, and stands for the log Lagrange multiplier for the detrended budget constraint.

11 Introduce

cc =

L)

L)

C

L

UCC (C,

ULL (C,

, ll =

,

UC (C, L)

UL (C, L)

cl,c =

L)

L)

C

L

UCL (C,

U (C,

, cl,l = CL

.

UL (C, L)

UC (C, L)

=

cl,l

UL L

=

.

UC C cl,c

3.3

m t,t+1 = t+1 t t+1 ,

(3.19)

e t+1

M t,t+1 = e

.

e t t+1

(3.20)

Combining equations from (3.14) to (3.18) derives the SDF12 . The log

SDF relates the pricing kernel to macroeconomics variables as following:

m t,t+1 = cc (c t+1 c t ) + ( cl,l ) (l t+1 l t )

( t+1 (1 + ) E t [ t+1 ])

X

[ (E t+1 E t )ei c t+ i ]

i

(3.21)

X

[ (E t+1 E t )ei l t+ i ]

( ) [

X

(E t+1 E t )ei t+ i ].

The SDF depends on the framework of temporal utility, i.e., cc the risk

aversion with respect to consumption13 , cl,l the preference parameter denoting the non-separable characteristics in consumption and leisure, the

ratio of the expenditure shares for consumption and leisure, the risk aversion of the temporal utility, and the curvature of the EZ recursive utility

function . Note that, when coming to the expected utility ( = 0 and = ),

the SDF will be deduced from the function of second moments of the utility

function and the shock scaled by the risk aversion as

m t,t+1 = cc (c t+1 c t ) + ( cl,l ) (l t+1 l t ) ( t+1 t ),

(3.22)

If consumption and leisure are not non-separable, i.e., cl,l = 0 and = 0,

then the SDF can be rewritten as

m t,t+1 = cc (c t+1 c t ) ( t+1 t ),

(3.23)

13 Due to the EZ formulation, the role for will be the characterization of intertemporal

cc

10

given the parameters of the recursive utility function, the SDF can be explained by six macro variables: news on consumption, leisure, the trend,

and their corresponding short-term growth rates.

3.4

f

Let r t be the log gross return of any asset r t = log(1 + R t ) and r t be the

log risk-free rate at time t. I assume that conditionally on information at

date t, m t,t+1 and r t+1 are jointly log-normally distributed, conditional on

information up to and including t. The asset pricing formula (3.5) can be

rewritten as

R)

+ E t [m t,t+1 ] + E t [r t+1 ] + 1 (2 + 2 + 2 m,r,t m,t r,t ). (3.24)

0 = log( M

r,t

2 m,t

For the risk-free rate, i.e., for an asset with 2r = 0,

f

E t [m t,t+1 ] 1 2 .

r t = log( M)

2 m,t

(3.25)

f

+ cc E t [c t+1 c t ] ( cl,l ) E t [l t+1 l t ] + E t [ t+1 ] 1 2 .

r t = log( M)

2 m,t

(3.26)

Furthermore, the risk premium on any asset is stated as

f

E t [r t+1 ] r t+1 +

2t

rt

2

( cl,l ) Cov t (r t+1 , l t+1 )

+ Cov t (r t+1 , t+1 )

X

e j c t+1+ j )

+ Cov t (r t+1 ,

(3.27)

j =0

+ Cov t (r t+1 ,

e j l t+1+ j )

j =0

+ ( ) Cov t (r t+1 ,

e j t+1+ j ).

j =0

To explain (3.27), I rewrite the equation into risk and risk-price repre14 Provided log is cointegrated with the log of total factor productivity.

11

sentation (Beta-representation)15 .

f

E t [r t+1 r t+1 ] +

2t

rt

2

= cc 2c c

( cl,l ) 2l l

+ 2

+ 2c

(3.28)

+ 2l l

+ ( ) 2 .

about future investment opportunities meanwhile future consumption growth.

The expected future variable will affect the investors current behavior through

inter-temporal consumption smoothing. Thats why the inter-temporal elasticity of substitution ( and ) enters the price of risk of the risk factors.

Moreover, the preference parameters ( cc , cl,l and ) denoting the nonseparability between consumption and leisure also goes into the risk price

for current and long-run leisure terms.

4

4.1

Test Methodology

State of the Economy

space form as follows:

X t = G X t1 + Hu t ,

(4.1)

where X t is a n 1 vector of a constant state variable and time varying

state variables, and u t is an m 1 vector of innovations to economic shocks

and measurement errors.

Yt = U X t + V u t ,

(4.2)

where Yt is a k 1 vector of observable variables and t is a vector of

measurement errors. This vector typically includes growth rates of noncointegrated I(1) observable variables, error correction variables from cointegrating relationships, and I(0) observable variables. The matrix G has

15 Define

a =

2a

2

as the risk loadings for factors therefore the risk price will be parameters 2a , and 2t 2t

is a term adjusting for the Jensen effect.

12

eigenvalues less than one in absolute values except for a single unit eigenvalue associated with a constant state variable. Let E t [.] = E[.| { X ts , Yts }

s=0 ]

be the conditional expectation operator for the agents in the economy, and

E Y ,t [.] = E[.| {Yts }

s=0 ] be the conditional expectation operator for the econometrician who only observes the present and past realizations of the observ0

0

ables. I assume that u t and t satisfy E t1 u t , E t1 u t u t = I, E t1 u t+ i u t+ i = 0

for i 6= j.

The news on observables at time t + s to the shocks at time t can be

calculated by the equation as follows:

E t [Yt+s ] E t1 [Yt+s ] =

V ut

UG s1 Hu t

f or

f or

s = 0,

s 1.

(4.3)

Suppose that consumption growth, c t = log(C t ) log(C t1 ), is g-th variable in Y . Then, the news on consumption growth is

(

0

e g V u t f or s = 0,

E t [ c t+s ] E t1 [ c t+s ] =

(4.4)

0

e g UG s1 Hu t f or s 1,

where e g is the k 1 selection vector with one in the g-th place and zeros

elsewhere.

Here X t contains in particular the log of the ratio of consumption to long

run trend growth (c t / t ), the log leisure l t , the log of the de-meaned growth

of the long-run trend t = log( t ) log( t1 ), and the excess returns r t

f

r t as the first, the second, the third, and the forth variables. I allow for

heteroskedasticity in the innovations but not in the VAR coefficients. The

news about consumption, leisure and the long-run trend are now given by

(for s 1)

0

E t [ c t+s ] E t1 [ c t+s ] = e 1UG s Hu t ,

(4.5)

0

0

4.2

(4.6)

(4.7)

The result from the equation (3.27) shows that expected log excess returns

of an asset depend on the assets betas with economic shocks. I assume that

the state space forms (4.1) and (4.2) are invertible. When a state space form

is invertible, the state variables can be expressed as a weighted sum of the

current and past realizations of observables, and an economic shock can be

expressed as a linear combination of the VAR innovations of the observables.

The identification of these shock components and the resulting asset-pricing

13

implications critically depends on two features in the model, the multivariate structure of predictability in all state variables and the recursive utility

form.

Hence, the set of information variables need to have predictive power

beyond that of lagged growth on consumption, leisure and the trend in the

VAR system16 . These three predictor variables can be motivated as follows.

First, the per capita consumption tracks the business cycle, and there are a

number of reasons why expected returns on the stock market could co-vary

with the business cycle. Second, leisure can be motivated by the dynamic

model itself and its data characteristics. Third, in order to investigate the

role of the long-run trend in the data, I proceed somewhat artificially as

follows. Constructing t as the transformation of the growth rate on past

aggregate consumption

t = t1 + (1 )(logC t logC t1 )

(4.8)

c t = logC t logC t1 t

(4.9)

has zero autocorrelation: = 0.71. I also try alternatives for this trend,

per = 0.9 and = 0.5. Here I can interpret t as a medium frequency

filter to consumption; consumers care about the lagged value of aggregate

consumption which differs from habit formation in that it is independent of

an individual consumers own consumption.

I also put excess returns as elements in VAR (Hansen et al. (2008) and

Malloy et al. (2009)). I choose FamaFrench 25 size- and book-to-marketportfolios as test assets, then the VAR differs across test assets to avoid

spurious correlation between a given test asset and innovations. Because

my VARs differ across test assets, therefore the conditional expectations for

consumption, leisure and the trend are different depending on the excess

return of interest so that I do not obtain a consistent model for dynamics

across the test assets. There is no obvious bias in this procedure, but the

varying variable dynamics across test assets are somewhat unappealing. To

address the impact of estimating a separate VAR for each test asset, I repeat

the approach above and estimate a mean VAR in order to see the effects on

estimating risks and prices of risks.

Now I rewrite the SDF as the representation of the infinite order VAR

innovations of Yt spanning the space of economic shocks

m t,t+1 = ~

a u t+1 ~

b U(I G)1 Hu t+1 ,

0

(4.10)

16 Barsky and Sims (2011) propose the identification methodology of two technology shocks

in a structural VAR analysis. They put the first variable as the measure of technology.

14

a ,~

b and, additionally, the vector ~

e 4 , are defined by

0

cc

(1 )

0

(1 )

cl,l

1

0

~

~

a=

,b =

,~

e4 =

(4.11)

0 .

.

.

.

.

.

.

.

0

0

0

Equation (4.10) is similar as the equation (3) in Hansen et al. (2008). In

their paper, the SDF is written as

0

m t,t+1 = m + Um X t + ~

b (I G)1 u t+1 ,

b is defined as

(1 )

(1 )

0

.

~

b=

.

0

(4.12)

(4.13)

0

Here I can rewrite ~

b (I G)1 as (). The vector () is the discounted

impulse response of consumption to each of the respective components of the

standardized shock vector u t+1 . As emphasized by Bansal and Yaron (2005),

the contribution of the discounted response to the stochastic discount factor

makes consumption predictability a potentially potent way to enlarge risk

prices, even over short horizons. Further the term () captures the bad

beta of Campbell and Vuolteenaho (2004) except that they measure shocks

using the market return instead of aggregate consumption.

In this paper, () reflects the discounted impulse response of consumption, leisure and the trend to the standardized shocks. Since the consumption and leisure reacts oppositely to the shock, therefore both of them decreases risk prices if the long run leisure risk is predominated. Otherwise,

the discounted response to the stochastic discount factor enlarge risk prices

if the long run consumption risk is predominated. Hence, this flexible feature helps to explain the cross-sectional equity premiums. Need to mention,

15

this feature also creates an important measurement challenge in implementation. Under the alternative interpretation suggested by Anderson et al.

0

(2003), ~

b () is the contribution to the induced prices because investors

cannot identify potential model mis-specification that is disguised by shocks

which impinge on investment opportunities. In considering how big the concern is about model mis-specification, I ask that it could be ruled out with

historical carefully accounted leisure data and a mis-specificied measure test

(HansenJagannathan distance).

4.3

Data Description

leisure, non-durable consumption, and asset markets.

4.3.1. Asset Returns. I use three test assets, 25 size- and book-to-market

sorted portfolios, 25 size- and momentum portfolios, and 30 industrial-sorted

portfolios on the left-hand side of the unconditional first order condition, the

equation (31). I use the three-month T-bill rate from FRED over the period

January 1948 to December 2011 as the riskless rate of interest.

4.3.2. Consumption. The real level series for nondurables and services is

obtained by accumulating the log growth rates, and taking the exponent of

the resulting series with the first value of the series normalized to one. The

series is then rescaled in the base year (2005). To generate the per capita

series, I use a filtered version of the quarterly population series. To deal

with the seasonality issue, the population series I use is the exponent of the

HodrickPrescott trend of the logarithm of the original population series.

4.3.3. Leisure. To calculate leisure data, I collect working, schooling and

home production, communication and personal care hours, respectively.

Time spent working includes paid hours in the private sector, as well as

hours worked for the government (either voluntarily or involuntarily) and

unpaid family labor17 .

For school hours, I base the calculation on information from the Digest

of Education Statistics (DES) and Historical Statistics for college enrollment

data from 1940 on. Hours per day attended for secondary school are based

on time-use studies and AHTUS and 2003 BLS ATUS. The hours spent by

college students are taken from the time-diary studies from Babcock and

Marks (2010).

17 The inclusion of government workers and unpaid family labor is consistent with the post-

World War II US Department of Labor, Bureau of Labor Statistics (BLS) labor series, as well

as the fact that gross domestic product includes the output of these workers.

16

Home production data comes from AHTUS 1965, 1975, 1985 and BLS

20032010. Commuting time is also considered: in the absence of firm evidence, I assume that commute times were 10 percent of total hours worked,

equal to the average during the last 40 years of the sample. The time-use

studies of high school and college students from the late 1920s to the present

all suggest school commute times approximately equal to 10 percent of total

time spent on school and homework. Thus I use a constant 10 percent commute time for this activity as well. For personal care time, I subtract 77

hours from the time endowment. This number is very similar to the estimates for all individuals ages 15 and up in the time-use surveys of the

2000s.

5

5.1

Basic Results

Data Analysis

for filtered per capita consumption, leisure and the transformed past aggregate consumption trend.

The figures 10 and 11 show different news for four variables in the bootstrapping impulse response functions. In particular, a bad shock increases

leisure growth and decreases consumption growth, which is consistent with

theory.

5.1.1. A Linear-factor Asset Pricing Model. In this part, results are reported under unconditional covariance among variables; a linear-factor asset

pricing model, the equation (30), explains cross-sectional returns on assets.

To avoid models that researchers would never consider in practice, I

narrow down the focus to my new long-run factor, the consumption-based

CAPM, and the FamaFrench three-factor modelsto price 25 size- and bookto-market ratio portfolios. Since the FamaFrench three-factor model obtains a factor-structure pattern, it is chosen as the benchmark18 .

My new factor model is stated as:

1. The model with long-run consumptionleisure trend three factors:

ytN+31 = 0 + 1 lrc t+1 + 2 lrl t+1 + 3 lr g t+1 ,

(5.1)

where growths on per capita consumption, leisure and the consumption trend

are represented by factors lrc t+1 , lrl t+1 and lr g t+1 denoting long-run growth

among these variables19 .

18 Lewellen, Nagel and Shanken (2009) advocate this solution to the problem.

19 To identify preference parameters in equation (31), I also estimate a six-factor model:

ytN+61 = 0 + 1 c t+1 + 2 l t+1 + 3 g t+1 + 4 lrc t+1 + 5 lrl t+1 + 6 lr g t+1 .

17

AP M

ytCC

= 0 + 1 c ndur

+1

t+1 ,

(5.2)

where c ndur

t+1 is the growth rate of non-durable consumption.

3. Fama and French (1993) (FF3) document the role of size and book/market

in the cross-section of expected stock returns, and show that CAPM are not

supported by the data

3

eM

ytFF

+1 = 0 + 1 R t+1 + 2 SMB t+1 + 3 HML t+1 ,

(5.3)

where R teM

+1 , SMB t+1 and HML t+1 stand for the market return, size and

book-to-market ratio factors, respectively.

I turn to the main findings of the paper now. This subsection first looks at

how portfolios load on these factors, and then I examine whether the factor

loadings are significantly priced. For the purpose of comparison, the factor

exposures in benchmark models are reported. Table 3 and Table 4 explain

the portfolios exposures to CCAPM and FamaFrench three-factor models

via multivariate and univariate time-series regressions. Each row in the

tables from left to right represents the size portfolios from small to big in a

given book-to-market category. Each column from top to bottom corresponds

to lowest to highest book-market quintiles for a given size category. There is

a weak correlation between average returns and the exposures to the market

factor. The SMB factor captures the size effect and the HML factor lines up

with returns on the book-and-market dimension. Almost all factor loadings

are statistically significant at block bootstrapping 5% level. Likewise, Table

5 and Tables 6 show the performance on my linear-factor model.

The long-run leisure factor explains the size effect, while it does negatively line up well with returns on the book-to-market effect; the estimated

long-run consumption betas behave oppositely to the long-run leisure. The

consumption trend lines up with returns on the size- and book-to-market

effects like the long-run consumption betas. With univariate regression,

the trend captures size and book-to-market effects, simultaneously. The

long-run consumption factor obtains these characteristic, so does the longrun leisure. To sum up, the factor loadings are significant for my new factor model: the long-run factors can capture the book-and-market and size

spreads.

In order to further examine whether the risks measured by these factor

loadings are significantly priced, I can look at the results of cross-sectional

regressions. I consider two alternative formulations (with and without the

constant term) to assess the models ability to capture the cross-section of

average returns. The constant term should be zero according to theory; a

non-zero large constant term indicates that a model cannot price the assets

18

on average. A non-zero 0 can also be interpreted as a zero-beta rate different from the risk free rate that is imposed20 . In some specifications, the

sign and magnitude of the estimated risk premia are found to depend on the

inclusion of the constant.

Table 7 gives us the prices of risk, R 2 , and pricing error tests without

the constant term for all candidates. The first row (mean) shows the s

(prices of risk) for factors after average innovations are taken from the VAR.

The second row (vector) gives the results when 25 cells innovations are

used to price the risks on FamaFrench 25 portfolios, since I put each test

portfolio as the fourth element in the VAR estimation. From the third to

the eighth rows, various standard errors (i.i.d., Shanken, and GMM) and

bootstrapping (5000 times) upperlower bands are shown. If the estimated

standard errors stay between the upper and the lower band, it means the

estimates are not statistically significant. The long-run factors statistically

can price risks on assets well, comparing the same performances on market

return and book-to-market loadings in the FamaFrench three-factor model.

Besides, the trend factor is able to explain the risk, though its factor loadings are small via time-series regressions. It should be mentioned that the

upperlower bands here are computed using mean innovations: the vector

upperlower bands are not reported. However, the risk prices are still significant for all long-run factors. Similar results are shown in Table 8. Then the

R 2 s (Adjusted R 2 s) are 79.4% (76.6%) and 89.8% (88.5%) for my long-run

three-factor models and FamaFrench three-factor, respectively. Without

the constant term, the FamaFrench three-factor model still has higher explanatory powers than my model: the difference is about 10%, while CCAPM

obtains the lowest. In the last three columns of the table, I test the pricing

errors with Alpha tests: the null hypothesis states that the pricing errors are

zero. My model cannot be rejected by the hypothesis, while pricing errors are

significantly not equal to zero for the other candidates.

Tables 9 and 10 give us the direct image from the cross-sectional regression with a constant term, in which the 0 s for the two models are quite small

for the zero-beta portfolio and are also insignificant. Like the results without

a constant term, the long-run factor loadings significantly price risks of assets. R 2 s (Adjusted R 2 s) on my factor models obtain less explanatory power

for the benchmark. According to the Alpha tests, the null hypothesis, which

states that the pricing errors are zero, cannot be rejected for my model, but

the CCAPM and FamaFrench three-factor model obtains significant pricing

errors.

To avoid the generated regressors problem, the cross-sectional regression by GMM is reported in Table 11. The long-run factors statistically sig20 Burnside (2011) shows that the constant can be interpreted as the models pricing error

for the risk free rate.

19

nificantly price risks. The J-test in the last two columns cannot be rejected,

in which the null hypothesis states that the model is valid. In the literature, those linear factor models are usually rejected by this statistical test21 .

From Table 11, I can conclude that my factor model is valid: I cannot statistically reject the null hypothesis. This method statistically proves such

results from Table 5 to Table 10.

Using equation (31), I can identify the preference parameters under the

unconditional covariance matrix, such as , and . A six-factor model

ytN+61 = 0 + 1 c t+1 + 2 l t+1 + 3 g t+1 + 4 lrc t+1 + 5 lrl t+1 + 6 lr g t+1 is estimated via time-series and cross-sectional regressions22 . However, the last

four significant estimates empirics are of help in identifying the preference

parameters (the consumption-leisure ratio), (the curvature in EZ),

and (both characterize RRA and IES) in equation (31). Therefore the estimated RRA and IES are equal to 5.7832 and 1.4807 for vector innovations

(26.9072 and 0.4061 for mean innovations) after running a cross-sectional

regression without the constant term; while with the constant term, the applied RRA and IES are 2.0235 and 1.13102 for vector innovation (11.6050

and 0.5032 for mean innovations). In this case I empirically prove that IES

is not the inverse of RRA like the expected utility function does. Moreover,

I cannot simplify the stochastic discount factor (SDF) as the state space like

consumption growth Malloy et al. (2009), instead I need to apply the general

SDF to explain cross-sectional returns Hansen et al. (2008).

5.1.2. HansenJagannathan Distance and Multiple Comparison Test.

Because of drawbacks to the R 2 , I apply various HansenJagannathan (HJ)

distances to evaluate the pricing performances and to test the rankings. The

basic motivation of the HJ distance is to supply a method to find the least

mis-specified one among some candidates23 .

The basic HJ, the modified HJ Kan and Robotti (2008), the unconstrained

HJ, and the constrained HJ Gospodinov et al. (2010) are used to rank the

mis-specification of the candidates. The long-run three-factor model outperforms the other two across these four distance measures. In addition, the

statistical test will be that the distance measure is equal to zero as the null

hypothesis. For my model, the FamaFrench three-factor, and the CCAPM,

I cannot reject the null hypothesis for all HJ distance measures. Besides

21 If there are over-identifying restrictions, the test statistics are known to over-reject the

null hypothesis.

22 To save space, the tables are not reported in this paper.

23 Hansen and Jagannathan (1997) develop a measure of the degree of mis-specification

of an asset pricing model. This measure is defined as min m k m yk, the least squares

distance between the family of stochastic discount factors that price all the assets correctly

and the stochastic discount factor associated with and an asset pricing model.

20

rows to test whether the rank stays statistically true. The null hypothesis states that the winner obtains the minimum HJ distance among others. The last four rows of Table 12 show that the statistical p values are

0.2488, 0.3636, 0.2456 and 0.533, respectively, for my consumption-leisuretrend three-factor model cannot be used to reject the null hypothesis across

four distance measures. In other words, the model statistically gets the least

mis-specified measures compared to the other pricing models.

5.2

In this section, I will extend the candidate models and test portfolios, i.e.,

the FamaFrench 25 size and momentum, and 30 Industry-sorted portfolios.

For the candidate models, the following will be considered:

The Yogo non-durable and durable consumption model

Y ogo

dur

yt+1 = 0 + 1 c ndur

t+1 + 2 c t+1 ,

(5.4)

where c ndur

t+1 denotes durable consumption growth.

The FamaFrench 25 size and momentum, which are constructed monthly,

are the intersections of five portfolios formed on size (market equity, ME)

and five portfolios formed on prior (212) returns. The 30 industry-sorted

portfolios are NYSE, AMEX, and NASDAQ industry portfolios based on its

four-digit SIC code at that time, whose returns are from July of t to June of

t + 1.

To save space, I only report the important results, i.e., the Alpha tests, J

tests, R 2 s, and HJ mis-specified distance measures.

Table 13 shows that four models explain the FamaFrench 25 size- and

momentum- portfolios. The second and the third columns present R 2 s, consumptionleisure four-factor model obtains higher values on both R 2 and adjusted R 2 .

The results with a constant term are reported in the brackets below; the

FamaFrench three-factor gets more explanatory power than the others. The

fourth to the tenth columns show the results of the Alpha and Chi square

tests for pricing errors. Higher p values indicate that I cannot reject the

null hypothesis, that the pricing errors are zero. Like the result in pricing

the FamaFrench 25 size and book-to-market ratio portfolios, the Fama

French three-factor model statistically has non-zero pricing errors, though

my long-run three-factor does not. The last four columns represent misspecification measures; my long-run models statistically obtain the smallest

measures among the candidates, in other words, the model stays the least

mis-specified.

30 industry-sorted portfolios are priced by candidate models in Table 14.

Different from the above portfolios, the FamaFrench three-factor obtains

21

the highest R 2 s whether there is a constant term or not. All the factor models statistically get zero pricing errors to explain industry-sorted assets via

the Alpha and Chi square tests. The results on the mis-specification measures show that the FamaFrench three-factor statistically outperforms the

others.

Concluding Remarks

writes: . . . and relates the behavior of expected returns to the real economy

in a rather detailed way. In this paper, I have exhibited a model that meets

Famas objectives and, empirically, helps to explain the cross-sectional equity

premiums.

The non-separable consumption and leisure with EpsteinZin preference

allows the leisure dynamics to interact with the consumption to generate

interesting asset pricing implications. Comparing with a model with consumption only, incorporating leisure reduces the price of long-run risk and

leisure acts as a hedge. Hence, stocks with predominated long run leisure

risk will be relatively less risky and bear smaller average returns. Empirical

results show that growth (big) stocks obtain lower negative long run leisure

betas but smaller long run consumption betas, and vice visa for value (small)

stocks.

In concluding the paper, I point out some limitations and thus possible

extensions of this study. The neoclassical framework in the model can be extended to link asset prices with other types of intangible capital, e.g., human

capital and organizational capital. Empirically, the correlation between human capital, organizational capital, and physical capital and their relations

with the cross-section of equity returns is worth investigating further.

22

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24

Notes: The table reports the autocorrelation of leisure growth in Panel A. Panel B shows the

variance ratio test. If the growth is i.i.d., then the ratio should be equal to 1. A higher (lower)

than unity ratio implies positive (negative) autocorrelation dominates. Panel C investigates

time-varying volatility. Without time-varying volatility, the adjusted variance ratios would

be flat with respect to the horizon, and stay close to 1. Panel D runs regressions: l,t+ j =

a j + b j (p t d t ) + t+ j and (p t+ j d t+ j ) = a j + b j l,t + t+ j to see the predictive power with

leisure growth and real price-dividend ratio.

denote statistical significance at 5% level.

Panel A. Autocorrelation

Variable

Contant

Leisure Growth

0.3835**

0.0581

0.00157**

-0.00037

Horizon

2

5

10

VR

1.3912

2.1893

2.8579

Horizon

2

5

10

VR

0.5604

0.5220

0.5002

AdVR

1.5986

2.8203

2.0407

1.0186

1.0218

1.0285

0.6956

0.7229

0.7741

0.3712

0.3925

0.4407

AdVR

0.5486

0.5203

0.5000

1.0133

1.0145

1.0169

0.7021

0.7287

0.7770

0.3790

0.3993

0.4497

Horizon

1

3

5

b

R2

-1.1511**

0.0970

-1.1657**

0.0202

-1.1901**

0.0208

b

R2

-0.0171**

0.0970

-.01735**

0.0202

-.01751**

0.0208

25

Notes: The table reports the autocorrelation of average non-durable consumption growth in

Panel A. Panel B shows the variance ratio test. If the growth is i.i.d., then the ratio should

be equal to 1. A higher (lower) than unity ratio implies positive (negative) autocorrelation

dominates. Panel C investigates time-varying volatility. Without time-varying volatility, the

adjusted variance ratios would be flat with respect to the horizon, and stay close to 1. Panel

D runs regressions: c,t+ j = a j + b j (p t d t ) + t+ j and (p t+ j d t+ j ) = a j + b j c,t + t+ j to see

the predictive power with average consumption growth and real price-dividend ratio.

denote statistical significance at 5% level.

Panel A. Autocorrelation

Variable

Contant

0.2875**

0.0604

0.1111**

0.0335

Horizon

2

5

10

VR

1.1732

1.8449

2.1823

AdVR

1.0986

1.0203

2.0407

Horizon

2

5

10

VR

1.0361

1.5517

1.5750

AdVR

1.03

1.5123

1.5623

1.0134

1.0147

1.0170

0.6986

0.7227

0.7703

0.3777

0.3974

0.4432

1.0134

1.0147

1.0175

0.6998

0.7251

0.7775

0.3742

0.3954

0.4448

Horizon

1

3

5

b

R2

2.2189**

0.0723

2.2189**

0.0723

2.2347**

0.0725

b

R2

0.0326**

0.0723

0.0326**

0.0723

.03243**

0.0725

26

Notes: The table shows the exposures to consumption-based CAPM and Fama

French three-factor models when explain FamaFrench 25 size and book/market

ratio portfolios. To estimate the model, I extract innovations from VAR firstly, then

estimate s through time series regressions. It should be noted that the multi-step

procedure causes generated regressors problem in the estimation. The standard

errors are obtained by bootstrapping the VAR errors and returns and repeating the

3-step estimations for 5000 times, then report the upper and the lower band for estimated standard variances. Here the model is estimated with multivariate betas.

denote block bootstrapping statistical significance at 5% level.

Growth

Small

2

3

4

Big

-0.42

0.24

0.62

0.92

0.89

2

3

4

Average Excess Returns %

1.36

1.66

2.27

1.33

1.96

2.13

1.52

1.62

1.98

1.14

1.86

1.83

1.01

1.37

1.30

Value

2.60

2.42

2.22

1.97

1.37

Small

2

3

4

Big

0.5601**

0.5642**

0.5347**

0.5194**

0.4764**

0.4353**

0.4141**

0.4097**

0.4382**

0.3982**

Small

2

3

4

Big

1.4302**

1.0454**

0.7391**

0.4145**

-0.198**

1.2243**

0.9104**

0.5929**

0.3291**

-0.1526**

Small

2

3

4

Big

-0.3683**

-0.4304**

-0.5056**

-0.5097**

-0.3825**

-0.0562**

-0.0706

-0.0638**

-0.0374**

-0.0692**

M

0.3034**

0.3545**

0.3489**

0.4325**

0.3471**

SMB

1.0849**

0.7409**

0.5019**

0.2271**

-0.1903**

HML

0.0884**

0.0883**

0.1374**

0.1831**

0.1339**

0.2802**

0.3528**

0.3937**

0.4149**

0.3948**

0.3885**

0.4464**

0.372**

0.5078**

0.469**

1.0146**

0.6751**

0.4055**

0.2465**

-0.1784**

1.0798**

0.7535**

0.5859**

0.3469**

-0.1296**

0.1927**

0.3018**

0.3418**

0.2897**

0.3458**

0.4392**

0.5251**

0.4734**

0.5031**

0.4681**

Small

2

3

4

Big

0.0104

-0.0025

-0.0026

-0.0084

-0.0094

0.0154

-0.0029

-0.0051

-0.0096

-0.0153

N onc

0.0022

-0.0023

-0.0069

-0.0063

-0.0146

27

0.0038

0.0001

-0.004

-0.0041

-0.0087

0.0097

0.0052

-0.0033

0.0067

-0.0013

Notes: The table shows the exposures to consumption-based CAPM and Fama

French three-factor models when explain FamaFrench 25 size and book/market

ratio portfolios. To estimate the model, I extract innovations from VAR firstly,

then estimate s through time series regressions. It should be noted that the

multi-step procedure causes generated regressors problem in the estimation.

The standard errors are obtained by bootstrapping the VAR errors and returns

and repeating the 3-step estimations for 5000 times, then report the upper and

the lower band for estimated standard variances. Here the model is estimated

with univariate betas.

denote block bootstrapping statistical significance at 5% level.

Growth

Small

2

3

4

Big

-0.42

0.24

0.62

0.92

0.89

2

3

4

Average Excess Returns %

1.36

1.66

2.27

1.33

1.96

2.13

1.52

1.62

1.98

1.14

1.86

1.83

1.01

1.37

1.30

Value

2.60

2.42

2.22

1.97

1.37

Small

2

3

4

Big

1.001**

0.9042**

0.7972**

0.6915**

0.4629**

0.7843**

0.6768**

0.5828**

0.5345**

0.3631**

Small

2

3

4

Big

1.8063**

1.4244**

1.0987**

0.7639**

0.1221**

1.5158**

1.1878**

0.8673**

0.6225**

0.1141**

Small

2

3

4

Big

-0.4905

-0.5525

-0.6206

-0.6207

-0.4827

-0.1515

-0.1606

-0.1521

-0.1309

-0.153

M

0.5975**

0.5523**

0.4744**

0.476**

0.2791**

SMB

1.2876**

0.9778**

0.735**

0.516**

0.0416**

HML

0.0214

0.0114

0.0623

0.091

0.061

0.5431**

0.5087**

0.4697**

0.4521**

0.3069**

0.6426**

0.5998**

0.4841**

0.5497**

0.3813**

1.2015**

0.9103**

0.6678**

0.5232**

0.0847**

1.3383**

1.0505**

0.8333**

0.6851**

0.1827**

0.1307

0.2254

0.2575

0.2013

0.2628

0.3542

0.4287

0.3931

0.3948

0.3692

Small

2

3

4

Big

0.0104

-0.0025

-0.0026

-0.0084

-0.0094

0.0154

-0.0029

-0.0051

-0.0096

-0.0153

N onc

0.0022

-0.0023

-0.0069

-0.0063

-0.0146

28

0.0038

0.0001

-0.004

-0.0041

-0.0087

0.0097

0.0052

-0.0033

0.0067

-0.0013

Notes: The table shows the exposures to consumption-leisure-trend three-factor model when

explain FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I

extract innovations from VAR firstly, then estimate s through time series regressions. It

should be noted that the multi-step procedure causes generated regressors problem in the

estimation. The standard errors are obtained by bootstrapping the VAR errors and returns

and repeating the 3-step estimations for 5000 times, then report the upper and the lower

band for estimated standard variances. Here the model is estimated with multivariate betas.

denote block bootstrapping statistical significance at 5% level, denote block bootstrapping statistical significance at 1% level

Growth

Small

2

3

4

Big

-0.42

0.24

0.62

0.92

0.89

Small

2

3

4

Big

13.247**

11.865**

6.84**

4.00**

-4.498**

Small

2

3

4

Big

-9.451**

-5.941**

-8.689**

-3.364**

-9.856**

Small

2

3

4

Big

-0.1505**

-0.1244**

-0.1507**

-0.106**

-0.0938**

2

3

4

Average Excess Returns %

1.36

1.66

2.27

1.33

1.96

2.13

1.52

1.62

1.98

1.14

1.86

1.83

1.01

1.37

1.30

LrC

10.391**

10.732**

16.669**

8.349**

6.914**

11.801**

7.664**

5.935**

7.434**

5.41**

7.866**

6.743**

3.559**

4.967**

6.676**

LrL

-7.538**

-8.18**

-5.22**

-5.643**

-5.525**

-5.36**

-5.927**

-4.76**

-3.89**

-3.87**

-3.35**

-3.738**

-5.44**

-3.552**

-5.024**

LrT

-0.0739** -0.0707** -0.074**

-0.0949** -0.0372** -0.0668**

-0.1217** -0.1108** -0.0803**

-0.0878** -0.1219** -0.0982**

-0.0571** -0.0402** -0.0952**

29

Value

2.60

2.42

2.22

1.97

1.37

18.946**

12.897**

8.07**

11.77**

13.228**

-7.06**

-4.575**

-7.29**

-3.163**

-5.77**

-0.0459**

-0.0705**

-0.0653**

-0.0476**

-0.0503**

Notes: The table shows the exposures to consumption-leisure-trend three-factor model when

explain FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I

extract innovations from VAR firstly, then estimate s through time series regressions. It

should be noted that the multi-step procedure causes generated regressors problem in the

estimation. The standard errors are obtained by bootstrapping the VAR errors and returns

and repeating the 3-step estimations for 5000 times, then report the upper and the lower

band for estimated standard variances. Here the model is estimated with univariate betas.

denote block bootstrapping statistical significance at 5% level, denote block bootstrapping statistical significance at 1% level

Growth

Small

2

3

4

Big

-0.42

0.24

0.62

0.92

0.89

Small

2

3

4

Big

0.260**

-0.901**

-1.825**

-1.870**

-1.128**

Small

2

3

4

Big

-0.389**

-0.323**

-0.037**

0.059**

-0.471**

Small

2

3

4

Big

-0.0129**

-0.0001**

-0.0057**

-0.0017**

-0.0056**

2

3

4

Average Excess Returns %

1.36

1.66

2.27

1.33

1.96

2.13

1.52

1.62

1.98

1.14

1.86

1.83

1.01

1.37

1.30

LrC

0.673**

0.026**

1.232**

-0.017**

0.51**

1.017**

-0.436**

0.045**

0.483**

-0.296** -0.106** -0.097**

-0.838** -0.647** -0.593**

LrL

-0.56**

-0.494** -0.633**

-0.525** -0.582** -0.578**

-0.297** -0.238** -0.258**

-0.219** -0.139**

-0.29**

-0.37**

-0.236** -0.271**

LrT

0.0004** 0.0071** 0.0096**

0.0046** 0.012** 0.0141**

0.0052** 0.0122** 0.0085**

0.0071** 0.0074** 0.0075**

0.0016** 0.007** 0.0097**

30

Value

2.60

2.42

2.22

1.97

1.37

0.675**

0.417**

-0.298**

-0.012**

-0.522**

-0.474**

-0.332**

-0.13**

-0.087**

-0.293**

0.0107**

0.0148**

0.0079**

-0.0016**

-0.004**

31

se GMM12

se GMM0

se Shanken

mean

vector

se i.i.d.

se GMM12

se GMM0

se Shanken

mean

vector

se i.i.d.

se GMM12

se GMM0

se Shanken

mean

vector

se i.i.d.

M

0.025

0.025

0.008**

[0.024 0.08]

0.009**

[0.048 0.316]

0.009**

[0.047 0.293]

0.007**

[0.048 0.313]

SMB

0.003

0.003

0.004**

[0.016 0.046]

0.004**

[0.037 0.207]

0.004**

[0.036 0.195]

0.004**

[0.033 0.221]

HML

0.020

0.020

0.004**

[0.016 0.063]

0.005**

[0.034 0.285]

0.005**

[0.033 0.274]

0.005**

[0.036 0.264]

FamaFrench Three-factor

-0.418

-0.418

0.162**

[0.221 0.704]

0.205**

[0.269 2.849]

0.191**

[0.26 3.023]

0.19**

[0.273 2.956]

N onC

CCAPM

-0.138

-0.137

0.027**

[0.082 0.332]

0.079**

[0.242 1.053]

0.086**

[0.233 1.06]

0.092**

[0.213 0.934]

LrL

LrT

-4.385

-13.597

1.401**

[0.185 0.608]

4.102**

[0.646 1.698]

4.012**

[0.602 1.73]

3.64**

[0.536 1.652]

Long-run Three-factor

-0.137

-0.134

0.027**

[0.082 0.332]

0.079**

[0.242 1.052]

0.086**

[0.233 1.059]

0.092**

[0.213 0.933]

LrC

0.794

0.766

0.042

0.002

R2

0.898

0.885

0.007

0.006

8.710

0.015

0.014

1.622

Alpha

0.005

0.004

1.246

88.684

10.182

12.920

17.993

103.437

63.761

80.017

121.204

2

94.683

75.990

64.455

92.160

0

0.985

0.935

0.706

0

0

0

0

p value

0

0

0

0

Notes: The table gives the risk price for FamaFrench three-factor, consumption-based CAPM and the consumption-leisure-trend three-factor model

when explaining FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I extract innovations from VAR firstly, then estimate

s through time series and cross-sectional regressions simultaneously. It should be noted that the multi-step procedure causes generated regressors

problem in the estimation. The standard errors are obtained by bootstrapping the VAR errors and returns while repeating the 3-step estimations

for 5000 times. Each bracket reports the upper and the lower bands for estimated standard variances. Here the model, without constant term, is

estimated with multivariate betas. The null hypothesis on 2 test is the pricing errors are equal to zeros.

The last four columns show statistics like R 2 , adjusted R 2 , Alpha statistics, 2 statistics and their p values. For Alpha statistics, RMSE, MAE, and

Shanken correction are shown. For 2 statistics, the table shows i.i.d., Shanken and GMM cases, respectively.

denote block bootstrapping statistical significance at 5% level.

32

se GMM12

se GMM0

mean

vector

se i.i.d.

se GMM12

se GMM0

mean

vector

se i.i.d.

se GMM12

se GMM0

mean

vector

se i.i.d.

M

0.034

0.034

0.01**

[0.027 0.087]

0.012**

[0.055 0.35]

0.009**

[0.055 0.339]

SMB

-0.006

-0.006

0.005**

[0.018 0.049]

0.005**

[0.044 0.21]

0.006**

[0.039 0.2]

HML

0.024

0.024

0.005**

[0.017 0.071]

0.006**

[0.033 0.296]

0.006**

[0.034 0.264]

FamaFrench Three-factor

-0.418

-0.418

0.162**

[0.221 0.704]

0.191**

[0.26 3.023]

0.19**

[0.273 2.956]

N onC

CCAPM

-8.089

1.750

2.528**

[32.975 963.745]

8.361**

[114.076 2786.668]

7.291**

[104.14 2892.26]

LrL

Long-run Three-factor

7.923

-4.198

2.516**

[32.911 963.495]

8.315**

[113.82 2785.769]

7.236**

[103.93 2891.486]

LrC

-5.657

-15.099

1.454**

[0.179 0.796]

4.421**

[0.505 2.194]

4.158**

[0.451 2.294]

LrT

0.794

0.766

0.042

0.002

R2

0.898

0.885

0.007

0.006

0.015

0.014

Alpha

0.005

0.004

88.684

12.920

17.993

103.437

80.017

121.204

2

94.683

64.455

92.160

0

0.935

0.706

0

0

0

p value

0

0

0

Notes: The table gives the risk price for FamaFrench three-factor, consumption-based CAPM and the consumption-leisre-trend three-factor model

when explaining FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I extract innovations from VAR firstly, then estimate

s through time series and cross-sectional regressions simultaneously. It should be noted that the multi-step procedure causes generated regressors

problem in the estimation. The standard errors are obtained by bootstrapping the VAR errors and returns while repeating the 3-step estimations

for 5000 times. Each bracket reports the upper and the lower bands for estimated standard variances. Here the model, without constant term, is

estimated with univariate betas. The null hypothesis on test is the pricing errors are equal to zeros.

The last four columns show statistics like R 2 , adjusted R 2 , Alpha statistics, 2 statistics and their p values. For Alpha statistics, RMSE and MAE

are shown. For 2 statistics, the table shows i.i.d. and GMM cases, respectively.

denote block bootstrapping statistical significance at 5% level.

33

se GMM12

se GMM0

se Shanken

mean

vector

se i.i.d.

se GMM0

se GMM0

se Shanken

mean

vector

se i.i.d.

se GMM12

se GMM0

se Shanken

mean

vector

se i.i.d.

0.027

0.027

0.005

[0.004 0.006]

0.005

[0.005 0.014]

0.005

[0.005 0.0133]

0.005

[0.005 0.013]

M

-0.033

-0.033

0.01**

[0.022 0.045]

0.011**

[0.035 0.106]

0.01**

[0.032 0.106]

0.01**

[0.034 0.108]

SMB

0.002

0.002

0.004**

[0.014 0.034]

0.004**

[0.023 0.078]

0.004**

[0.022 0.07]

0.004**

[0.023 0.069]

FamaFrench Three-factor

HML

0.012

0.012

0.004**

[0.015 0.04]

0.004**

[0.026 0.086]

0.004**

[0.025 0.077]

0.004**

[0.024 0.078]

0.015

0.015

0.005

[0.004 0.005]

0.005

[0.004 0.011]

0.005

[0.004 0.011]

0.004

[0.003 0.01]

N onC

0.111

0.111

0.185

[0.156 0.348]

0.189

[0.17 0.588]

0.193

[0.166 0.566]

0.181

[0.167 0.57]

CCAPM

0.020

0.016

0.004

[0.004 0.006]

0.007

[0.006 0.016]

0.006

[0.006 0.016]

0.006

[0.006 0.016]

-0.104

0.033

0.027

[0.024 0.183]

0.045**

[0.055 0.318]

0.044**

[0.054 0.302]

0.044**

[0.045 0.299]

LrC

-0.103

0.031

0.027

[0.024 0.183]

0.045**

[0.055 0.318]

0.044**

[0.054 0.302]

0.044**

[0.045 0.299]

LrL

Long-run Three-factor

2.238

0.425

0.955**

[0.202 0.536]

1.559**

[0.422 0.995]

1.74**

[0.359 0.876]

1.76**

[0.36 0.867]

LrT

0.328

0.232

0.016

-0.026

R2

0.723

0.684

0.005

0.004

2.730

0.006

0.005

1.044

Alpha

0.003

0.003

1.221

66.743

24.446

35.156

55.156

78.381

75.105

75.621

85.787

2

62.839

51.463

55.391

76.061

0

0.272

0.027

0

0

0

0

0

p value

0

0

0

0

Notes: The table gives the risk price for FamaFrench three-factor, consumption-based CAPM and the consumption-leisure-trend three-factor model

when explaining FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I extract innovations from VAR firstly, then estimate

s through time series and cross-sectional regressions simultaneously. It should be noted that the multi-step procedure causes generated regressors

problem in the estimation. The standard errors are obtained by bootstrapping the VAR errors and returns while repeating the 3-step estimations for

5000 times. Each bracket reports the upper and the lower bands for estimated standard variances. Here the model, with constant term, is estimated

with multivariate betas. The null hypothesis on test is the pricing errors are equal to zeros.

The last four columns show statistics like R 2 , adjusted R 2 , Alpha statistics, 2 statistics and their p values. For Alpha statistics, RMSE, MAE, and

Shanken correction are shown. For 2 statistics, the table shows i.i.d., Shanken and GMM cases, respectively.

denote block bootstrapping statistical significance at 5% level.

34

se GMM12

se GMM0

mean

vector

se i.i.d.

se GMM12

se GMM0

mean

vector

se i.i.d.

se GMM12

se GMM0

mean

vector

se i.i.d.

0.027

0.027

0.005

[0.004 0.006]

0.005

[0.005 0.013]

0.005

[0.005 0.013]

M

-0.040

-0.040

0.012**

[0.025 0.053]

0.012**

[0.037 0.131]

0.013**

[0.037 0.133]

SMB

0.013

0.013

0.005**

[0.017 0.037]

0.005**

[0.026 0.086]

0.006**

[0.025 0.084]

FamaFrench Three-factor

HML

0.008

0.008

0.005**

[0.015 0.041]

0.005**

[0.027 0.083]

0.005**

[0.025 0.081]

0.015

0.015

0.005

[0.004 0.005]

0.005

[0.004 0.011]

0.004

[0.003 0.01]

N onC

0.111

0.111

0.185

[0.156 0.348]

0.193

[0.166 0.566]

0.181

[0.167 0.57]

CCAPM

0.020

0.016

0.004

[0.004 0.006]

0.006

[0.006 0.016]

0.006

[0.006 0.015]

-0.249

-18.988

1.903**

[21.788 438.019]

2.638**

[58.41 762]

2.574**

[54.8 761.749]

LrC

0.155

17.377

1.911**

[21.785 437.9]

2.65**

[58.424 762]

2.578**

[54.825 761.63]

LrL

Long-run Three-factor

1.524

-1.925

0.973**

[0.23 0.684]

1.824**

[0.398 1.3]

1.782**

[0.397 1.403]

LrT

0.328

0.232

0.016

-0.026

R2

0.723

0.684

0.005

0.004

0.006

0.005

Alpha

0.003

0.003

66.743

35.156

55.156

78.381

75.621

85.787

2

62.839

55.391

76.061

0

0.027

0

0

0

0

p value

0

0

0

Notes: The table gives the risk price for FamaFrench three-factor, consumption-based CAPM and the consumption-leisure-trend three-factor model

when explaining FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I extract innovations from VAR firstly, then estimate

s through time series and cross-sectional regressions simultaneously. It should be noted that the multi-step procedure causes generated regressors

problem in the estimation. The standard errors are obtained by bootstrapping the VAR errors and returns while repeating the 3-step estimations for

5000 times. Each bracket reports the upper and the lower bands for estimated standard variances. Here the model, with constant term, is estimated

with univariate betas. The null hypothesis on test is the pricing errors are equal to zeros.

The last four columns show statistics like R 2 , adjusted R 2 , Alpha statistics, 2 statistics and their p values. For Alpha statistics, RMSE and MAE

are shown. For 2 statistics, the table shows i.i.d. and GMM cases, respectively.

denote block bootstrapping statistical significance at 5% level.

35

mean

vector

se GMM12

mean

vector

se GMM12

mean

vector

se GMM12

se GMM12

mean

vector

se GMM0

se GMM12

mean

vector

se GMM0

se GMM12

mean

vector

se GMM0

0.020

0.020

0.005**

[0.021 0.076]

0.025

0.025

0.009**

[0.048 0.297]

0.006**

[0.049 0.312]

0.000

0.000

0.003**

[0.013 0.042]

0.003

0.003

0.004**

[0.036 0.194]

0.005**

[0.033 0.223]

SMB

HML

LrC

-0.418

-0.418

0.197**

[0.27 3.082]

0.184**

[0.273 2.927]

0.015

0.015

0.004**

[0.016 0.052]

0.236

0.236

0.087*

[0.092 0.438]

-0.032

-0.089

0.063

[0.05 0.24]

-0.032

-0.088

0.063

[0.05 0.24]

-0.138

-0.137

0.1**

[0.247 1.142]

0.104**

[0.208 0.982]

LrL

LrT

-0.710

-2.735

1.399**

[0.15 0.513]

-4.385

-13.597

4.265**

[0.653 1.744]

4.009**

[0.562 1.67]

Long-run Three-factor

-0.137

-0.134

0.1**

[0.246 1.141]

0.104**

[0.208 0.981]

N onC

CCAPM

0.020

0.020

0.006**

[0.035 0.283]

0.007**

[0.036 0.259]

FamaFrench Three-factor

0.013

0.012

0.014

0.013

0.007

0.006

0.007

0.006

0.015

0.014

0.005

0.004

Alpha

18.554

55.969

94.761

12.920

17.993

80.017

121.204

64.455

92.160

J Stat.

0.673

0.935

0.706

0

0

0

0

p value

Notes: The table gives the risk price for FamaFrench three-factor, consumption-based CAPM and the long-run consumption-leisuretrend three-factor model when explain FamaFrench 25 size and book/market ratio portfolios. To estimate the model, I extract

innovations from VAR firstly, then estimate s through two-stage GMM (Cochrane, 2000). It should be noted that the multi-step

procedure causes generated regressors problem in the estimation. The standard errors are obtained by bootstrapping the VAR errors

and returns while repeating the 2-step estimations for 5000 times. Each bracket reports the upper and the lower bands for estimated

standard variances. The null hypothesis on 2 test (J statistics) is the pricing errors are equal to zeros.

The last three columns show statistics like Alpha statistics, 2 statistics and their p values. For Alpha statistics, GMM and GMM

with 12 lags correction are shown, respectively. For J statistics, the table shows GMM and GMM with 12 lags cases.

denote block bootstrapping statistical significance at 5% level.

36

HJ

H JM

H JU

H JC

HJ

H JM

H JU

H JC

HJ

H JM

H JU

H JC

HJ

H JM

H JU

H JC

Misspe.

0.54**

0.642**

0.54**

0.53**

H0 :

H0 :

H0 :

H0 :

Stat.

73.25

103.437

0.292

0.192

CCAPM

p value

0

0

0

0

68.749

94.683

0.274

0.174

Stat.

0

0

0

0.012

p value

LR 3 < FF 3 < CC AP M

LR 3 < FF 3 < CC AP M

LR 3 < FF 3 < CC AP M

LR 3 < FF 3 < CC AP M

0.523**

0.614**

0.523**

0.511**

Misspe.

FamaFrench Three-factor

65.531

88.684

0.261

0.13

Stat.

p value :0.2488

p value :0.3636

p value :0.2456

p value :0.533

0.511**

0.594**

0.511**

0.507**

Misspe.

0

0

0.012

0.01

p value

Long-run Three-factor

Notes: Because of drawbacks on R 2 , I apply various HansenJagannathan (HJ) distance to evaluate pricing performances and to test the rankings

(Zhang, 2011). The basic motivation of HJ distance supplies a method in order to find the least mis-specified one among candidates. Hansen and

Jagannathan (1997) develop a measure of degree of misspecification of an asset pricing models. This measure is defined as: min m k m yk the least

squares distance between the family of stochastic discount factors that price all the assets correctly and the stochastic discount factor associated with

and an asset pricing model.

The basic HJ, modified HJ (Kan and Robotti, 2008), unconstrained HJ and constrained HJ (Gospodinov,Kan and Robotti, 2010) are used to rank

misspecified measures on candidate models.

Candidates are: consumption-based CAPM, FamaFrench three-factor, and long-run three-factor models.

37

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

R

0.584

0.6528

0.6269

(0.227)

(0.917)

(0.3828)

Adj R

0.5679

0.6054

0.576

(0.1)

(0.9051)

(0.2947)

R Square(W Constant)

0

0

0

(0)

(0)

(0)

i.i.d.

0

0

0.914

(0)

(0.28)

(0.999)

Shank

0

0

0.643

(0)

(0.405)

(0.969)

GMM0

0

0

0.092

(0)

(0)

(0.656)

GMM12

0

0

0.643

GMM0

0

0

0.963

GMM12

0

0

0.589

GMM12 2

P value on J Test

0.590

0.581

0.571

HJ

0.731

0.714

0.696

MHJ

0.600

0.581

0.571

HJU

Mis. Measure

0.582

0.572

0.561

HJC

Notes: The second and the third columns present R 2 s and adjusted R 2 s. Results with the constant term are reported in the brackets below. From

the forth to the tenth columns show results on Alpha and Chi square tests for pricing errors. Higher p values stands for we cannot reject the null

hypothesis on pricing errors are equal to zeros. The last four columns represent mis-specified measures.

Table 13: R Squares, Alpla, and J Tests on FamaFrench 25 Size and Momentum

38

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

Yogo

FamaFrench 3

Long-Run 3

R2

0.315

0.786

0.746

(0.165)

(0.283)

(0.021)

Adj R 2

0.291

0.762

0.718

(0.135)

(0.200)

(-0.092)

R Square(W Constant)

0.189

0.268

0.211

(0.673)

(0.664)

(0.700)

i.i.d.

0.868

0.488

0.995

(0.728)

(0.685)

(0.741)

Shank

0.662

0.337

0.964

(0.643)

(0.644)

(0.743)

GMM0

0

0

0.516

(0.000)

(0.041)

(0.019)

GMM12

0.662

0.337

0.964

GMM0

0

0

0.516

GMM12

0

0

0.486

GMM12 2

P value on J Test

0.352

0.332

0.317

HJ

0.376

0.352

0.334

MHJ

0.352

0.332

0.317

HJU

Mis. Measure

0.340

0.327

0.310

HJC

Notes: The second and the third columns present R 2 s and adjusted R 2 s. Results with the constant term are reported in the brackets below. From

the forth to the tenth columns show results on Alpha and Chi square tests for pricing errors. Higher p values stands for we cannot reject the null

hypothesis on pricing errors are equal to zeros. The last four columns represent mis-specified measures.

Notes: Figure shows the average weekly leisure which takes accounts demographic and sector

movements: adjusted leisure hours takes the demographic between different age cohorts

into account; efficiency leisure hours consider about the productivity (real wage) among age

cohorts; Tornqvist leisure hours use time-varying weights.

39

Notes: Figure shows non-durable consumption and services.

Notes: Figure shows the growth rate on average weekly leisure hours, which take the first

order difference between log leisure hours.

40

Notes: Figure shows the growth rate on non-durable consumption and services, which take

the first order difference between log consumption and services.

41

42

Notes: Figure shows the correlation analysis for quarterly and annual consumption with asset returns. The left part calculates the correlation between cumulative consumption growth

P

P

and cumulative excess market returns, corr( kj=1 g c,t+ j , kj=1 r t+ j ). The right part shows

the bivariate spectral analysis for the quarterly data in the first column and the annual data

in the second column. The coherence measures the correlation between consumption and

returns at frequency . When the frequency is , the corresponding length of the cycle is 1/

quarters. The cospectrum at frequency can be interpreted as the portion of the covariance

between consumption growth and asset returns that is attributable to cycles with frequency

. The slope of the phase spectrum at any frequency precisely measures the number of

leads or lags between consumption and asset returns. When this slope is positive, consumption leads the market returns.

43

Notes: Figure shows the correlation analysis for quarterly and annual leisure with asset

returns. The left part calculates the correlation between cumulative leisure growth and cuP

P

mulative excess market returns, corr( kj=1 g l,t+ j , kj=1 r t+ j ). The right part shows the bivariate spectral analysis for the quarterly data in the first column and the annual data in

the second column. The coherence measures the correlation between leisure and returns at

frequency . When the frequency is , the corresponding length of the cycle is 1/ quarters.

The cospectrum at frequency can be interpreted as the portion of the covariance between

leisure growth and asset returns that is attributable to cycles with frequency . The slope

of the phase spectrum at any frequency precisely measures the number of leads or lags

between leisure and asset returns. When this slope is positive, leisure leads the market

returns.

44

Notes: Figure shows the impulse responses functions for all growth variables in VAR to a

shock. The green line stands for point estimates and the dash line denotes the 20% and 80%

bands.

Notes: Figure shows the impulse responses functions for all log variables in VAR to a shock.

The green line stands for point estimates and the dash line denotes the 20% and 80% bands.

45

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