C-CAPM and the Cross-Section of Sharpe Ratios
AbstractThis paper studies if the consumption-based asset pricing model can explain the cross-section of Sharpe ratios. The 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for Financial Research in its series SIFR Research Report Series with number 18.
Length: 17 pages
Date of creation: 15 Aug 2003
Date of revision:
Contact details of provider:
Postal: Institute for Financial Research Drottninggatan 89, SE-113 60 Stockholm, Sweden
Web page: http://www.sifr.org/
More information through EDIRC
Cosumption-based asset pricing; habit persistence; recursive utility; idiosyncratic risk; multivariate GARCH;
Other versions of this item:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2003-12-14 (All new papers)
- NEP-CFN-2003-12-14 (Corporate Finance)
- NEP-FIN-2003-12-14 (Finance)
- NEP-FMK-2003-12-14 (Financial Markets)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-62, June.
- Campbell, John Y., 2003.
"Consumption-based asset pricing,"
Handbook of the Economics of Finance,
in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887
- John Y. Campbell, 2002. "Consumption-Based Asset Pricing," Harvard Institute of Economic Research Working Papers 1974, Harvard - Institute of Economic Research.
- Campbell, John, 1993.
"Intertemporal Asset Pricing Without Consumption Data,"
3221491, Harvard University Department of Economics.
- Campbell, John Y, 1993. "Intertemporal Asset Pricing without Consumption Data," American Economic Review, American Economic Association, vol. 83(3), pages 487-512, June.
- John Y. Campbell, 1992. "Intertemporal Asset Pricing Without Consumption Data," NBER Working Papers 3989, National Bureau of Economic Research, Inc.
- Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
- Martin Lettau & Sydney Ludvigson, 2001.
"Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying,"
Journal of Political Economy,
University of Chicago Press, vol. 109(6), pages 1238-1287, December.
- Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York.
- Ravi Bansal & Robert F. Dittmar & Christian T. Lundblad, 2005. "Consumption, Dividends, and the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 60(4), pages 1639-1672, 08.
- Svensson, Lars E. O., 1989.
"Portfolio choice with non-expected utility in continuous time,"
Elsevier, vol. 30(4), pages 313-317, October.
- Svensson, L.E.O., 1988. "Portfolio Choice With Non-Expected Utility In Continuous Time," Papers 423, Stockholm - International Economic Studies.
- Mankiw, N. Gregory, 1986.
"The equity premium and the concentration of aggregate shocks,"
Journal of Financial Economics,
Elsevier, vol. 17(1), pages 211-219, September.
- N. Gregory Mankiw, 1986. "The Equity Premium and the Concentration of Aggregate Shocks," NBER Working Papers 1788, National Bureau of Economic Research, Inc.
- Lettau, Martin, 1998.
"Idiosyncratic Risk and Volatility Bounds, or, Can Models with Idiosyncratic Risk Solve the Equity Premium Puzzle?,"
CEPR Discussion Papers
1795, C.E.P.R. Discussion Papers.
- Martin Lettau, 2001. "Idiosyncratic risk and volatility bounds, or can models with idiosyncratic risk solve the equity premium puzzle?," Staff Reports 130, Federal Reserve Bank of New York.
- Robert F. Engle & Kevin Sheppard, 2001.
"Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH,"
NBER Working Papers
8554, National Bureau of Economic Research, Inc.
- Engle, Robert F & Sheppard, Kevin K, 2001. "Theoretical and Empirical Properties of Dynamic Conditional Correlation Multivariate GARCH," University of California at San Diego, Economics Working Paper Series qt5s2218dp, Department of Economics, UC San Diego.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anki Helmer).
If references are entirely missing, you can add them using this form.