Abstract
We extend the Consumption-based CAPM (CCAPM) 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 CCAPM'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 study and correspond to the theoretical values often discussed in the literature. The theoretical model is then generalized to higher-degree risk changes and higher-order risk averse representative agents.
| Original language | English |
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| Publication status | Published - 29 Sept 2012 |
| Event | 24th Northern Finance Association Meeting - Niagara Falls, Niagara Falls, Canada Duration: 29 Sept 2012 → 30 Sept 2012 https://northernfinanceassociation.org/wp-content/uploads/2014/12/NFA2012Program.pdf |
Conference
| Conference | 24th Northern Finance Association Meeting |
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| Country/Territory | Canada |
| City | Niagara Falls |
| Period | 29/09/12 → 30/09/12 |
| Internet address |
Bibliographical note
The same paper is also presented at:1) 2012 Mathematical Finance Days
2) 2013 30th International Conference of the French Finance Association (AFFI)
3) 2013 ARIA Annual Meeting
4) 2013 The 7th China Insurance Education Form and 10th Anniversary
5) 2013 FMA Annual Meeting
6) 2013 40th Seminar of the European Group of Risk and Insurance Economists (EGRIE)