A Theoretical Extension of the Consumption-based CAPM Model

Jingyuan Li and Georges Dionne ()

Cahiers de recherche from CIRPEE

Abstract: We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker dependence condition than first-degree expectation dependence to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order representative agents, and are linked to the equity premium puzzle.

Keywords: Consumption-based CAPM; Risk premium; Equity premium puzzle (search for similar items in EconPapers)
JEL-codes: D51 D80 G12 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-upt
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http://www.cirpee.org/fileadmin/documents/Cahiers_2010/CIRPEE10-47.pdf (application/pdf)

Related works:
Working Paper: A theoretical extension of the consumption-based CAPM model (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:1047

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