Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns

Joachim Grammig () and Andreas Schrimpf

No 06-032, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research

Abstract: This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. The novelty is that we use a broad cross-section of test assets, which provides a level playing field for a comparison to well-established benchmark models. We also motivate a specification that accounts for the return on human capital as a determinant of the reference level. We find that this extension does a good job in explaining the cross-sectional variation in average returns across the 25 Fama- French portfolios with pricing errors close to those of Lettau/Ludvigson's celebrated scaled factor models.

Keywords: Consumption-based Asset Pricing; Cross-Section of Stock Returns; Reference Level (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:4616

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