Preferences and observed risk premia: an empirical analysis

Lucie Samson and Maxim Armstrong

Applied Economics Letters, 2007, vol. 14, issue 6, 435-439

Abstract: The fundamental prediction of the Consumption-based Capital Asset Pricing Model (CCAPM) relates asset returns to their covariance with the intertemporal marginal rate of substitution (IMRS). With utility subjected to constant relative risk aversion, the IMRS is characterized by only one economic variable namely, consumption growth. One explanation for the disappointing empirical performance of the CCAPM model may be that the constant relative risk aversion specification is too restrictive. In this article we consider alternative specifications and compare their empirical performance with the reference model using Canadian data.

Date: 2007
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DOI: 10.1080/13504850601057823

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