### Abstract

Original language | English |
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Publisher | CIRRELT |

Number of pages | 40 |

Publication status | Published - Mar 2012 |

### Publication series

Name | CIRRELT |
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No. | CIRRELT-2012-11 |

### Fingerprint

### Keywords

- Consumption-based CAPM
- risk premium
- equity premium puzzle
- expectation dependence
- Ross risk aversion

### Cite this

*An extension of the consumption-based CAPM model*. (CIRRELT; No. CIRRELT-2012-11). CIRRELT.

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**An extension of the consumption-based CAPM model.** / DIONNE, Georges; LI, Jingyuan; OKOU, Cedric.

Research output: Working paper › Working paper series

TY - UNPB

T1 - An extension of the consumption-based CAPM model

AU - DIONNE, Georges

AU - LI, Jingyuan

AU - OKOU, Cedric

PY - 2012/3

Y1 - 2012/3

N2 - We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We first use the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence (FED) rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and propose the measure of second-degree expectation dependence (SED) to obtain the values of asset price and equity premium. These theoretical results are linked to the equity premium puzzle. Using the same dataset as in Campbell (2003), the estimated measures of relative risk aversion from FED and SED approximations are much lower than those obtained in the original theoretical model is then generalized to higher-degree risk changes and higher-order risk averse representative agents.

AB - We extend the Consumption-based CAPM (C-CAPM) model to representative agents with different risk attitudes. We first use the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence (FED) rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and propose the measure of second-degree expectation dependence (SED) to obtain the values of asset price and equity premium. These theoretical results are linked to the equity premium puzzle. Using the same dataset as in Campbell (2003), the estimated measures of relative risk aversion from FED and SED approximations are much lower than those obtained in the original theoretical model is then generalized to higher-degree risk changes and higher-order risk averse representative agents.

KW - Consumption-based CAPM

KW - risk premium

KW - equity premium puzzle

KW - expectation dependence

KW - Ross risk aversion

UR - https://commons.ln.edu.hk/sw_master/2729

M3 - Working paper series

T3 - CIRRELT

BT - An extension of the consumption-based CAPM model

PB - CIRRELT

ER -