An extension of the consumption-based CAPM model

Georges Dionne (), Jingyuan Li and Cédric Okou ()
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Cédric Okou: HEC Montreal, Finance Department

No 12-4, Working Papers from HEC Montreal, Canada Research Chair in Risk Management

Abstract: We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We first use the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence (FED) rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and propose the measure of second-degree expectation dependence (SED) to obtain the values of asset price and equity premium. These theoretical results are linked to the equity premium puzzle. Using the same dataset as in Campbell (2003), the estimated measures of relative risk aversion from FED and SED approximations are much lower than those obtained in the original study and correspond to the theoretical values often discussed in the literature. The theoretical model is then generalized to higher-degree risk changes and higher-order risk averse representative agents.

Keywords: Consumption-based CAPM; Risk premium; Equity premium puzzle; Expectation dependence; Ross risk aversion (search for similar items in EconPapers)
JEL-codes: D51 D80 G12 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2023-07-17
New Economics Papers: this item is included in nep-upt
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Related works:
Working Paper: An Extension of the Consumption-based CAPM Model (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2012_004

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