An alternative representation of the C-CAPM with higher-order risks

Georges Dionne (), Jingyuan Li and Cédric Okou ()
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Cédric Okou: International Monetary Fund

The Geneva Risk and Insurance Review, 2024, vol. 49, issue 2, No 3, 194-233

Abstract: Abstract This paper exploits the concept of expectation dependence to propose an alternative representation of the consumption-based capital asset pricing model (C-CAPM). While the first-degree expectation dependence (FED) drives the C-CAPM’s riskiness for a risk-averse investor, the second-degree expectation dependence (SED) is required to account for the downside risk faced by a prudent investor. Theoretical and empirical assessments reveal that the expectation dependence-based C-CAPM can realistically match equity and variance risk premia. The consumption SED risk emerges as a fundamental source of uncertainty driving asset prices.

Keywords: C-CAPM; Expectation dependence; Higher-order risk; Equity risk premium; Variance risk premium (search for similar items in EconPapers)
JEL-codes: D51 D80 G12 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1057/s10713-023-00085-2

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