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Tail risk and the consumption CAPM

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  • Kwon, Ji Ho

Abstract

I examine if the market tail risk can be the conditioning information for consumption-based asset pricing model. While “cay”, Lettau and Ludvigson’s (2001) conditioning variable, no longer works in the extended sample period, I find that Value at Risk (VaR) is the conditioning variable that enables consumption CAPM to explain substantial variation of cross-section of stock returns. Asset’s riskiness is determined by the correlation with consumption growth conditional on the tail risk of the aggregate market.

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  • Kwon, Ji Ho, 2019. "Tail risk and the consumption CAPM," Finance Research Letters, Elsevier, vol. 30(C), pages 69-75.
    • Handle: RePEc:eee:finlet:v:30:y:2019:i:c:p:69-75
    DOI: 10.1016/j.frl.2019.03.025
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    Cited by:

    1. Goodell, John W., 2020. "COVID-19 and finance: Agendas for future research," Finance Research Letters, Elsevier, vol. 35(C).

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    More about this item

    Keywords

    Consumption capital asset pricing model; Conditioning variable; Tail risk; Value at Risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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