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A Theoretical Extension of the Consumption-based CAPM Model

Jingyuan Li () and Georges Dionne

Cahiers de recherche from CIRPEE

Abstract: We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker dependence condition than first-degree expectation dependence to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order representative agents, and are linked to the equity premium puzzle.

Keywords: Consumption-based CAPM; Risk premium; Equity premium puzzle (search for similar items in EconPapers)
JEL-codes: D51 D80 G12 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: 2010
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