Economics at your fingertips  

Peso Problems in the Estimation of the C-CAPM

Juan Parra-Alvarez (), Olaf Posch () and Andreas Schrimpf

No 16299, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper shows that the consumption-based capital asset pricing model (C-CAPM) with low-probability disaster risk rationalizes pricing errors. We find that implausible estimates of risk aversion and time preference are not puzzling if market participants expect a future catastrophic change in fundamentals, which just happens not to occur in the sample (a 'peso problem'). A bias in structural parameter estimates emerges as a result of pricing errors in quiet times. While the bias essentially removes the pricing error in the simple models when risk-free rates are constant, time-variation may also generate large and persistent estimated pricing errors in simulated data. We also show analytically how the problem of biased estimates can be avoided in empirical research by resolving the misspecification in moment conditions.

Keywords: Asset pricing errors; C-CAPM; Rare events (search for similar items in EconPapers)
JEL-codes: E21 G12 O41 (search for similar items in EconPapers)
Date: 2021-06
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at

Related works:
Journal Article: Peso problems in the estimation of the C‐CAPM (2022) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Ordering information: This working paper can be ordered from ... rs/dp.php?dpno=16299

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().

Page updated 2023-01-28
Handle: RePEc:cpr:ceprdp:16299