Tail risk and the consumption CAPM

Ji Ho Kwon

Finance Research Letters, 2019, vol. 30, issue C, 69-75

Abstract: I examine if the market tail risk can be the conditioning information for consumption-based asset pricing model. While “cay”, Lettau and Ludvigson’s (2001) conditioning variable, no longer works in the extended sample period, I find that Value at Risk (VaR) is the conditioning variable that enables consumption CAPM to explain substantial variation of cross-section of stock returns. Asset’s riskiness is determined by the correlation with consumption growth conditional on the tail risk of the aggregate market.

Keywords: Consumption capital asset pricing model; Conditioning variable; Tail risk; Value at Risk (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:30:y:2019:i:c:p:69-75

DOI: 10.1016/j.frl.2019.03.025

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