Abstract

http://ssrn.com/abstract=1724699
 
 

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A Theoretical Extension of the Consumption-Based CAPM Model


Georges Dionne


HEC Montreal - Department of Finance

Jingyuan Li


Lingnan University - Department of Finance and Insurance

May 31, 2011


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.

Number of Pages in PDF File: 27

Keywords: Consumption-Based CAPM, Risk Premium, Equity Premium Puzzle, Expectation Dependence, Ross risk aversion

JEL Classification: D51, D80, G12

working papers series


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Date posted: December 13, 2010 ; Last revised: June 2, 2011

Suggested Citation

Dionne, Georges and Li, Jingyuan, A Theoretical Extension of the Consumption-Based CAPM Model (May 31, 2011). Available at SSRN: http://ssrn.com/abstract=1724699 or http://dx.doi.org/10.2139/ssrn.1724699

Contact Information

Georges Dionne (Contact Author)
HEC Montreal - Department of Finance ( email )
3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada
514-340-6596 (Phone)
514-340-5019 (Fax)
HOME PAGE: http://www.hec.ca/gestiondesrisques/
Jingyuan Li
Lingnan University - Department of Finance and Insurance ( email )
Castle Peak Road
Tuen Mun, New Territories
Hong Kong
China
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