Firm Characteristics, Consumption Risk, and Firm-Level Risk Exposures∗

Firm-level risk exposures and costs of equity are notoriously difficult to estimate. Using a novel approach mapping consumption risk exposures to firm characteristics, we combine the traditional portfolio-level approach to testing asset pricing models with firm-level information to measure firm-level risk expo-sures. First, at the portfolio level, we investigate the empirical performance of a simple two-factor consumption-based asset pricing model for the cross-section of equity returns. The priced factors in the model are innovations in the growth and volatility of aggregate consumption. Our empirical re-sults show that this model can explain 66 % of the cross-sectional variation in returns on a menu of 55 portfolios spanning size, value, momentum, asset growth, stock issuance, and accruals. Second, we use the estimated model to map point-in-time firm characteristics to consumption risk exposures. Through this measurement procedure, we uncover sizeable cross-sectional and time-series variation in firm con-sumption risk exposures. We verify that sorting on these ex ante consumption risk exposures produces portfolios with consistent ex post risk exposures and predicts cross-sectional variation in future firm equity returns