C-CAPM and the Cross-Section of Sharpe Ratios

Söderlind, Paul
Authors registered in the RePEc Author Service: Paul Söderlind

No 4067, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This Paper studies whether the consumption-based asset-pricing model can explain the cross-section of Sharpe ratios. The constant relative risk aversion (CRRA) model and several extensions (habit persistence, recursive utility and idiosyncratic shocks) all imply that the Sharpe ratio is linearly increasing in the asset?s correlation with aggregate consumption growth. Results from quarterly data on 40 US portfolios (1947?2001) and 10 international portfolios (1957/1971?2001) suggest that both the unconditional and conditional C-CAPM have serious problems: there is a great deal of variation in Sharpe ratios, but most portfolios have relatively similar and low correlations with aggregate consumption growth.

Keywords: Consumption-based asset pricing; Habit persistence; Recursive utility; Idiosyncratic risk; Multivariate garch (search for similar items in EconPapers)
JEL-codes: E13 E32 G12 (search for similar items in EconPapers)
Date: 2003-09
New Economics Papers: this item is included in nep-cfn, nep-fin, nep-fmk and nep-rmg
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Working Paper: C-CAPM and the Cross-Section of Sharpe Ratios (2003)
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