Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying

Posted: 19 Nov 2001

See all articles by Martin Lettau

Martin Lettau

University of California - Haas School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Sydney C. Ludvigson

New York University - Department of Economics; National Bureau of Economic Research (NBER)

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Abstract

This paper explores the ability of conditional versions of the CAPM and the consumption CAPM - jointly the (C)CAPM - to explain the cross section of average stock returns. Central to our approach is the use of the log consumption-wealth ratio as a conditioning variable. We demonstrate that such conditional models perform far better than unconditional specifications and about as well as the Fama-French three-factor model on portfolios sorted by size and book-to-market characteristics. The conditional consumption CAPM can account for the difference in returns between low-book-to-market and high-book-to-market portfolios and exhibits little evidence of residual size or book-to-market effects.

Suggested Citation

Lettau, Martin and Ludvigson, Sydney C., Resurrecting the (C)Capm: A Cross-Sectional Test When Risk Premia are Time-Varying. Journal of Political Economy, Vol. 109, December 2001. Available at SSRN: https://ssrn.com/abstract=289208

Martin Lettau

University of California - Haas School of Business ( email )

Haas School of Business
545 Student Services Building
Berkeley, CA 94720
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5106436349 (Phone)

HOME PAGE: http://faculty.haas.berkeley.edu/lettau/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
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Sydney C. Ludvigson (Contact Author)

New York University - Department of Economics ( email )

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New York, NY 10012
United States
212-998-8927 (Phone)
212-995-4186 (Fax)

HOME PAGE: http://www.econ.nyu.edu/user/ludvigsons/

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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