27 Pages Posted: 13 Dec 2010 Last revised: 2 Jun 2011
Date Written: May 31, 2011
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.
Keywords: Consumption-Based CAPM, Risk Premium, Equity Premium Puzzle, Expectation Dependence, Ross risk aversion
JEL Classification: D51, D80, G12
Suggested Citation: Suggested Citation
Dionne, Georges and Li, Jingyuan, A Theoretical Extension of the Consumption-Based CAPM Model (May 31, 2011). Available at SSRN: https://ssrn.com/abstract=1724699 or http://dx.doi.org/10.2139/ssrn.1724699