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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | Measuring idiosyncratic consumption risk – an empirical study based on Swiss debit card data |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 50 |
| Date | 2021 |
| Abstract Text | This thesis investigates the heterogeneity of consumption risks in Switzerland by analyzing Swiss debit card data. In an attempt to model the mechanism of prices and returns of assets, Breeden and Litzenberger (1978) laid the groundwork for the consumption-based asset pricing model (CCAPM) by assuming securities with a high sensitivity to movements in real aggregate consumption to carry more systematic risk and therefore calling for a higher excess return. However, the model was quickly rejected due to the empirically measured risk aversion being excessively high resulting in an equity premium lower than empirically observed (Mehra and Prescott (1985)). With that, the term of the equity puzzle was introduced into academic literature (Mehra and Prescott (1985)). In an attempt to solve for the equity premium puzzle, different academic theories were developed. This section provides an overview of the relevant theories and corresponding empirical studies attempting to solve for the equity premium puzzle. Limited participation – The concept of limited participation calls for a difference in consumption patterns between stockholders and non-stockholders (Zeldes (1991)). It is empirically shown that the consumption of stockholders has a higher volatility and higher correlation to the stock market resulting in a lower risk aversion which in return implies a higher equity premium (Malloy, Moskowitz and Vissing‐Jørgensen (2009)). Idiosyncratic risk – Constantinides and Duffie (1996) challenge the assumption of the CCAPM of complete insurance of consumption shocks considering this is not realistic in empiricism. The authors assume agents to be subject to idiosyncratic shocks, resulting in measured consumption volatility on a household level to often exceed aggregate consumption variability. Number of heterogenous agents – However, models with idiosyncratic risk introduced by many authors (inter alia Constantinides and Duffie (1996)) have only two distinct type of agents. Expanding the model to a continuum of agents results in a higher consumption volatility (Den Haan (2001)), a further possible explanation for the equity premium puzzle. Another factor to take into consideration when empirically testing the CCAPM is the choice of data. Common data sources used in academic literature are food consumption data from the Panel Study of Income Dynamics (PSID) (Mankiw and Zeldes (1991)), non-durables and service data from the Consumer Expenditure Survey (CEX) (Attanasio and Weber (1995)) or luxury spending (Ait-Sahalia, Parker and Yogo (2004)). Nevertheless, these data sources have some downsides including survey bias and statistical smoothing, resulting in a lower measured volatility. Based on the theories on heterogenous consumers and the data issues established in current empirical studies, this thesis investigates the heterogeneity of consumption risk in Switzerland using debit card transaction data in an attempt to solve for the equity premium puzzle. More specifically, this paper examines heterogeneity of individual consumers by looking at individual consumption volatility compared to aggregate consumption risk as well as analyzing idiosyncratic risk. |
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