Paper Discussion: Consumption, Population, and the Cross-Section of Stock Returns Tzuling Lin, Richard MacMinn, and Larry Y. Tzeng 2009 Discussed by Jingjing Chai Goethe University, Frankfurt, Germany September, 2009, NYC

Motivation & Methods Motivation: CCAPM  CPCAPM: linking asset prices to the consumption and population/demographic Theory/Model: (1) CCAPM: Individuals are identical in all respects CPCAPM: (2) (3) Data & empirical analysis: as used in paper Jagannathan, Ravi, and Yong Wang, 2007, Lazy investors, discretionary consumption, and the cross-section of stock returns, Journal of Finance 62,

Contribution & Conclusion CPCAPM explains the excess return better than CCAPM used by Jagannathan and Wang, 2007 in JF as well as Fama and French three-factor model (w.r.t. insignificant intercept term and higher R 2 ); CPCAPM implies highly population/consumption risk-averse individuals and can not help resolve the equity premium puzzle.

Review & Question & To Do Utility function: –Time discount factor in utility function und SDF is missing; –Incorporating the riskless rate in the pricing kernel isn’t necessary; –Consumption risk/beta and risk-premium for consumption are positive; but how could the risk- premium for population and RRA of population be (significantly) negative? Economical explanation? –An example: 1.N  =200; c=1  C=output=200; 2.N=100; c=1  C=output=100; 3.N  =200; c=0.5  C=output=100; All individuals are identical and have the same consumption  nothing changed  expc. excess return should be the same? Lower consumption  expc. excess return should be different?

Review & Question & To Do

Alternative to consider the population factor: –Utility of a representative agent only over average consumption per capita, but per capita consumption constructed by age structure adjustment. –Constructing a “new” RA: