C-CAPM and the Cross-Section of Sharpe Ratios
AbstractThis 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.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4067.
Date of creation: Sep 2003
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Other versions of this item:
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-02-29 (All new papers)
- NEP-CFN-2004-02-29 (Corporate Finance)
- NEP-FIN-2004-02-29 (Finance)
- NEP-FMK-2004-02-29 (Financial Markets)
- NEP-RMG-2004-02-29 (Risk Management)
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