A Jump/Diffusion Consumption-Based Capital Asset Pricing Model and the Equity Premium Puzzle
AbstractThis paper derives the equilibrium excess returns on risky assets in an exchange economy where the underlying exogenous uncertainty is a combination of a pure multidimensional jump process and a diffusion model. We derive closed-form solutions for the interest rate and the risk premiums on risky assets for a traditional class of separable utility indices. Our analysis demonstrates that when the underlying jumps of the aggregate consumption process are not negligible, then the traditional form of the consumption-based capital asset princing model need not hold and the asset risk premiums may be larger than predicted by the traditional CCAPM in continuous time, based on pure It� diffusion processes. Our analysis suggests an explanation for the large estimates of the risk premiums reported in empirical tests of the single-beta CCAPM. Copyright 1993 Blackwell Publishers.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Mathematical Finance.
Volume (Year): 3 (1993)
Issue (Month): 2 ()
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627
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- Stephan Dieckmann & Michael Gallmeyer, .
"The Equilibrium Allocation of Diffusive and Jump Risks with Heterogeneous Agents,"
GSIA Working Papers
2003-E36, Carnegie Mellon University, Tepper School of Business.
- Dieckmann, Stephan & Gallmeyer, Michael, 2005. "The equilibrium allocation of diffusive and jump risks with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1547-1576, September.
- Aase, Knut K., 2000. "An equilibrium asset pricing model based on Lévy processes: relations to stochastic volatility, and the survival hypothesis," Insurance: Mathematics and Economics, Elsevier, vol. 27(3), pages 345-363, December.
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