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Estimating C-CAPM and the equity premium over the frequency domain

Sarantis Kalyvitis () and Ekaterini Panopoulou ()

Studies in Nonlinear Dynamics & Econometrics, 2013, vol. 17, issue 5, 551-571

Abstract: In this paper we estimate the single-factor Consumption Capital Asset Pricing Model (C-CAPM) over the frequency domain. We modify the standard two-step methodology (Fama and French 1992) to account for the spectral properties of consumption risk and we find that its lower frequencies explain up to 98% of the cross-sectional variation of expected returns and that the equity premium puzzle is eliminated. These results are robust to the definitions of the variables, the sample span and the set of portfolios utilized, and the maturity of interest rates.

Date: 2013
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