A theoretical extension of the consumption-based CAPM model

Jingyuan LI, Georges DIONNE

Research output: Working paperWorking paper series

Abstract

We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We use 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 an additional dependence condition to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order risk averse representative agents, and are linked to the equity premium puzzle.
Original languageEnglish
PublisherCIRRELT
Number of pages25
Publication statusPublished - Dec 2010
Externally publishedYes

Publication series

NameCIRRELT
No.CIRRELT-2010-60

Fingerprint

Capital asset pricing model
Representative agent
Risk-averse
Price premium
Asset prices
Riskiness
Equity premium
Risk attitude
Equity premium puzzle
Prudence
Risk aversion

Cite this

LI, J., & DIONNE, G. (2010). A theoretical extension of the consumption-based CAPM model. (CIRRELT; No. CIRRELT-2010-60). CIRRELT.
LI, Jingyuan ; DIONNE, Georges. / A theoretical extension of the consumption-based CAPM model. CIRRELT, 2010. (CIRRELT; CIRRELT-2010-60).
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LI, J & DIONNE, G 2010 'A theoretical extension of the consumption-based CAPM model' CIRRELT, no. CIRRELT-2010-60, CIRRELT.

A theoretical extension of the consumption-based CAPM model. / LI, Jingyuan; DIONNE, Georges.

CIRRELT, 2010. (CIRRELT; No. CIRRELT-2010-60).

Research output: Working paperWorking paper series

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AU - DIONNE, Georges

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AB - We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We use 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 an additional dependence condition to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order risk averse representative agents, and are linked to the equity premium puzzle.

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LI J, DIONNE G. A theoretical extension of the consumption-based CAPM model. CIRRELT. 2010 Dec. (CIRRELT; CIRRELT-2010-60).