Asset Pricing with Two Types of Heterogeneous Consumption Volatilities in Mind : Evidence from China

Current studies highlight asymmetric asset pricing in different environmental states. By dividing China's aggregate consumption into two specific sets, we ferret out two heterogeneous consumption volatilities, where the one positively mirrors good times and optimistic sentiment, and the other one positively maps bad times and pessimistic sentiment. Immediately after, we propose an asset pricing model, in which two consumption-based factors are associated with economic times and sentiment and antagonistically play roles. Theoretical and empirical analyses based on the model indicate that equity premiums are low in good times and optimistic sentiment but high in bad times and pessimistic sentiment. Equity premiums are more susceptible to bad times and pessimistic sentiment. Moreover, the model plausibly accounts for variations of cross-sectional patterns. The model outperforms the three- and five-factor models ( Fama & French, 1993 , 2015 ) at the stock portfolio level for its relatively minimal pricing error