Can the CRRA-Lognormal Framework Explain CAPM-Anomalies in the Cross-Section of Stock Returns?

Sabine Elmiger
Additional contact information
Sabine Elmiger: University of Zurich

No 13-43, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: A large number of empirical studies find systematic deviations from the CAPM. The CAPM tends to understate the returns on low-beta stocks and overstate the returns on high-beta stocks, i.e. the security market line is too steep. Other well-documented anomalies are the size premium and the value premium. The CAPM is a special case of the consumption-based CAPM. This study adresses the question whether the consumption-based CAPM with constant relative risk aversion preferences and lognormally distributed dividends can explain CAPM-anomalies. An example of an economy with power utility and lognormal dividends is examined that can be solved in closed form. The model leads to a security market line that is flatter than in the CAPM and generates a size and a value premium. The comparative statics suggest that cross-sectional anomalies and the equity premium puzzle are tightly linked.

Keywords: CAPM; CCAPM; CRRA; lognormality; multiple assets; beta premium; value premium; size premium (search for similar items in EconPapers)
Pages: 34 pages
Date: 2013-08, Revised 2016-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2312273 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 410 Gone

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1343

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().