The impact of heterogeneous consumption and productivity expectations on factor risk premia

Abstract

Recent theoretical asset pricing models with heterogeneous agents and recursive utility imply that disagreement in macroeconomic expectations influences financial risk premia. This paper provides empirical support for this hypothesis in a dynamic version of the Fama–French 5 factor model, where risk premia are determined by the cross-sectional variance of professional forecasts. Furthermore, we find that disagreement about future consumption affects stock market returns in general, while disagreement about productivity affects returns especially for stocks with small market capitalization and weak operating profitability.