Explaining the Poor Performance of Consumption-Based Asset Pricing Models
John Campbell () and
John Cochrane ()
Scholarly Articles from Harvard University Department of Economics
We show that the external habit-formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption-based model. The model economy produces time-varying expected eturns, tracked by the dividendâ€“price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture. Therefore, though the consumption-based model and CAPM are both perfect conditional asset pricing models, the portfolio-based models are better approximate unconditional asset pricing models.
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Published in Journal of Finance
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Working Paper: Explaining the Poor Performance of Consumption-Based Asset Pricing Models (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3163265
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