Asset Pricing With and Without Garbage : Resurrecting Aggregate Consumption

This paper challenges the view that alternative consumption measures (garbage, fourth quarter, unfiltered consumption) can address the shortcomings of consumption-based asset pricing. When the CRRA model is confronted with the cross-section of asset returns and the risk-free rate volatility, the fit of the alternative consumption processes is poor. Further, when I introduce a novel discount factor with disappointment aversion that improves the accuracy of the consumption-based framework, the canonical measure of aggregate consumption has a better fit than the alternative ones. I conclude that non-standard preferences are more important in improving the performance of consumption-based models than non-standard consumption measures