A theoretical extension of the consumption-based CAPM model

Jingyuan Li and Georges Dionne ()

No 10-8, 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 use 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 an additional dependence condition to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher-order risk averse representative agents, and are linked to the equity premium puzzle.

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: 27 pages
Date: 2011-05-31
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Related works:
Working Paper: A Theoretical Extension of the Consumption-based CAPM Model (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:crcrmw:2010_008

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