Dynamic Factors and the Predictability of Consumption Growth

Abhay Abhyankar, Olga Klinkowska

Research output: Working paper

Abstract

In this paper we study the predictability of aggregate consumption growth using common factors extracted from a large panel of macroeconomic and financial time series. The stochastic process followed by consumption growth and its predictability by other variables is a key assumption in theoretical models in finance such as consumption-based asset pricing models. Research using empirical data to investigate these aspects of consumption growth is sparse. We find that selected dynamic factors are able to explain up to 36% of the consumption growth variability at quarterly frequency using both in-sample and out-of-sample predictive regressions. We find as well that a single common factor, which summarizes short term interest rates and spreads on bond rates, individually accounts for as much as 23% of this variation. We also conduct a battery of robustness check which further support our main conclusion.
Original languageEnglish
PublisherSocial Science Electronic Publishing
Publication statusUnpublished - Feb 2011

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Dynamic factor
Consumption growth
Predictability
Common factors
Consumption-based asset pricing
Empirical data
Financial time series
Stochastic processes
Predictive regressions
Asset pricing models
Aggregate consumption
Finance
Macroeconomics
Robustness
Short-term interest rates

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Abhyankar, A., & Klinkowska, O. (2011). Dynamic Factors and the Predictability of Consumption Growth. Social Science Electronic Publishing.

Dynamic Factors and the Predictability of Consumption Growth. / Abhyankar, Abhay; Klinkowska, Olga.

Social Science Electronic Publishing, 2011.

Research output: Working paper

Abhyankar, A & Klinkowska, O 2011 'Dynamic Factors and the Predictability of Consumption Growth' Social Science Electronic Publishing.
Abhyankar A, Klinkowska O. Dynamic Factors and the Predictability of Consumption Growth. Social Science Electronic Publishing. 2011 Feb.
Abhyankar, Abhay ; Klinkowska, Olga. / Dynamic Factors and the Predictability of Consumption Growth. Social Science Electronic Publishing, 2011.
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