An Alternative Representation of the C-CAPM with Higher-Order Risks

47 Pages Posted: 2 Oct 2012 Last revised: 6 Apr 2018

See all articles by Georges Dionne

Georges Dionne

HEC Montreal - Department of Finance

Jingyuan Li

Lingnan University - Department of Finance and Insurance

Cedric Okou

University of Quebec at Montreal (UQAM)

Date Written: March 20, 2018

Abstract

This paper exploits the concept of expectation dependence to propose an alternative representation of the consumption-based capital asset pricing model (C-CAPM). While the first-degree expectation dependence (FED) drives the C-CAPM's riskiness for a risk-averse investor, the second-degree expectation dependence (SED) is required to account for the downside risk faced by a prudent investor. Theoretical and empirical assessments reveal that the expectation dependence-based C-CAPM can realistically match equity premia, risk-free rates, and variance risk premia. The consumption SED risk emerges as a fundamental source of uncertainty driving asset prices.

Keywords: C-CAPM, Expectation dependence, Higher-order risk, equity risk premium, variance risk premium

JEL Classification: D51, D80, G12

Suggested Citation

Dionne, Georges and Li, Jingyuan and Okou, Cedric, An Alternative Representation of the C-CAPM with Higher-Order Risks (March 20, 2018). Available at SSRN: https://ssrn.com/abstract=2155180 or http://dx.doi.org/10.2139/ssrn.2155180

Georges Dionne (Contact Author)

HEC Montreal - Department of Finance ( email )

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Montreal, Quebec H3T 2A7
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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

Cedric Okou

University of Quebec at Montreal (UQAM) ( email )

PB 8888 Station DownTown
Succursale Centre Ville
Montreal, Quebec H3C3P8
Canada
514-987-3000 Ext. 5521 (Phone)

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