Consumption-based CAPM; risk premium; equity premium puzzle; expectation dependence
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.
Copyright © Li, Dionne, and CIRRELT, 2010.
Access to external full text or publisher's version may require subscription.
Li, J., & Dionne, G. (2010). A theoretical extension of the consumption-based CAPM model (CIRRELT-2010-60). Canada: CIRRELT. Retrieved from https://www.cirrelt.ca/DocumentsTravail/CIRRELT-2010-60.pdf