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C-CAPM and the Cross-Section of Sharpe Ratios

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  • Söderlind, Paul

Abstract

This Paper studies whether the consumption-based asset-pricing model can explain the cross-section of Sharpe ratios. The constant relative risk aversion (CRRA) model and several extensions (habit persistence, recursive utility and idiosyncratic shocks) all imply that the Sharpe ratio is linearly increasing in the asset?s correlation with aggregate consumption growth. Results from quarterly data on 40 US portfolios (1947?2001) and 10 international portfolios (1957/1971?2001) suggest that both the unconditional and conditional C-CAPM have serious problems: there is a great deal of variation in Sharpe ratios, but most portfolios have relatively similar and low correlations with aggregate consumption growth.

Suggested Citation

  • Söderlind, Paul, 2003. "C-CAPM and the Cross-Section of Sharpe Ratios," CEPR Discussion Papers 4067, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:4067
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    More about this item

    Keywords

    Consumption-based asset pricing; Habit persistence; Recursive utility; Idiosyncratic risk; Multivariate garch;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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