Composition of wealth, conditioning information, and the cross-section of stock returns

"I test conditional implications of linear asset pricing models in which variables reflecting changing composition of total wealth capture time-variation in the consumption risk exposures of asset returns. I estimate conditional moments of returns and factor risk prices nonparametrically and show that while the consumption risk of value stocks does increase relative to that of growth stocks in "bad'' times, their conditional expected returns do not. Consequently, imposing the conditional moment restrictions results in large pricing errors, virtually eliminating the advantage of conditional models over the unconditional ones. Thus, exploiting conditioning information to impose joint restrictions on the time-series and the cross-sectional properties of asset returns exposes an additional challenge for consumption-based asset pricing models. While the puzzle is robust to alternative measures of consumption risk, it may be less pronounced for models that rely on the long-run consumption risk encoded in the aggregate financial wealth"--National Bureau of Economic Research web site.