| Summary: | Thesis: S.M. in Management Research, Massachusetts Institute of Technology, Sloan School of Management, May, 2020 === Cataloged from the official PDF of thesis. === Includes bibliographical references (pages 51-56). === This paper examines cyclical dynamics of idiosyncratic consumption risk using consumption data from the Nielsen Consumer Panel and the Panel Study of Dynamic Income. With GMM estimates and supplemental graphical analysis, I show that the idiosyncratic risk in consumption is i) highly persistent, with an autocorrelation coefficient near unity ii) strongly countercyclical, with the conditional variance rising by an average of 25 percent from peak to trough. Compared to previous findings on income dynamics, I show that the variance of idiosyncratic consumption risk is also countercyclical, but less so. Moreover, I do not find that consumption risk displays procyclical skewness, as has been shown with income risk. Furthermore, in a simple asset-pricing framework, the estimated countercyclical cross-sectional variance of consumption raises the equity premium by 4.1 percent from the representative-agent case, using a risk aversion of only 10-15. === by Allison Cole. === S.M. in Management Research === S.M.inManagementResearch Massachusetts Institute of Technology, Sloan School of Management
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