Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying

Martin Lettau and Sydney Ludvigson

Journal of Political Economy, 2001, vol. 109, issue 6, 1238-1287

Abstract: This paper explores the ability of conditional versions of the CAPM and the consumption CAPMjointly the (C)CAPMto explain the cross section of average stock returns. Central to our approach is the use of the log consumptionwealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the Fama-French three-factor model on portfolios sorted by size and book-to-market characteristics. The conditional consumption CAPM can account for the difference in returns between low-book-to-market and high-book-to-market portfolios and exhibits little evidence of residual size or book-to-market effects.

Date: 2001
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Working Paper: Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jpolec:v:109:y:2001:i:6:p:1238-1287

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