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Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns

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  • Grammig, Joachim G.
  • Schrimpf, Andreas

Abstract

This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. The novelty is that we use a broad cross-section of test assets, which provides a level playing field for a comparison to well-established benchmark models. We also motivate a specification that accounts for the return on human capital as a determinant of the reference level. We find that this extension does a good job in explaining the cross-sectional variation in average returns across the 25 Fama- French portfolios with pricing errors close to those of Lettau/Ludvigson's celebrated scaled factor models.

Suggested Citation

  • Grammig, Joachim G. & Schrimpf, Andreas, 2006. "Consumption-Based Asset Pricing with a Reference Level: New Evidence from the Cross-Section of Stock Returns," ZEW Discussion Papers 06-032, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:4616
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumption-based Asset Pricing; Cross-Section of Stock Returns; Reference Level;
    All these keywords.

    JEL classification:

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

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