Seasonality in Consumption-Based Asset Pricing: An Analysis of Linear Models

This paper examines linear asset pricing models using aggregate consumption data which are not seasonally-adjusted. Portfolio returns exhibit more diverse and often stronger consumption correlations and the parameters of representative-agent utility functions seems to be estimated more precisely using these data. We incorporate seasonality in the form of “taste shift” can be rejected using a short term bill or multiple asset returns. The data indicate that the “equity premium puzzle” is not an artifact of seasonal stocks, and seems to involve not only the relation of average returns to consumption covariances, but also the patterns of variation in expected returns over time.