Fuel is Pumping Premiums: A Consumption-Based Explanation of the Value Anomaly

The standard approach in empirical consumption-based asset pricing to use nondurables and services as a proxy for consumption appears inappropriate. We estimate substitution elasticities between different consumption bundles and show that households cannot substitute gasoline consumption by consumption of other nondurable goods or services. As a consequence, gasoline consumption shows up as a separate factor in the pricing kernel. Cross-sectional variation in gasoline consumption betas explains a large part of the value premium. Value stocks are typically more energy-intensive than growth stocks and thus riskier, since they suffer more from the gasoline supply shocks that also affect households.