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A theoretical extension of the consumption-based CAPM model

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  • Li, Jingyuan

    (Lingnan University)

  • Dionne, Georges

    (HEC Montreal, Canada Research Chair in Risk Management)

Abstract

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.

Suggested Citation

  • Li, Jingyuan & Dionne, Georges, 2011. "A theoretical extension of the consumption-based CAPM model," Working Papers 10-8, HEC Montreal, Canada Research Chair in Risk Management.
    • Handle: RePEc:ris:crcrmw:2010_008
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    More about this item

    Keywords

    Consumption-based CAPM; risk premium; equity premium puzzle; expectation dependence; Ross risk aversion;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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