C-CAPM Refinements and the Cross-Section of Returns

Paul Söderlind

University of St. Gallen Department of Economics working paper series 2006 from Department of Economics, University of St. Gallen

Abstract: This paper studies if the consumption-based asset pricing model can explain the cross-section of expected returns. The CRRA model and several refinements (habit persistence and idiosyncratic shocks) all imply that the conditional expected return is linearly increasing in the asset's conditional covariance with consumption growth. Results from quarterly data on the 25 Fama-French portfolios suggest that the model has serious problems: there are large and systematic pricing errors. In addition, the estimated time-varying effective risk aversion coefficients appear implausible and are unrelated with most candidates for habit persistence and idiosyncratic risk.

Keywords: consumption-based asset pricing; habit persistence; idiosyncratic risk; conditional asset pricing (search for similar items in EconPapers)
JEL-codes: E13 E32 G12 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2006-03
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Journal Article: C-CAPM Refinements and the Cross-Section of Returns (2006)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:dp2006:2006-07

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