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C-CAPM and the Cross-Section of Sharpe Ratios

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  • Söderlind, Paul

    (University of St. Gallen)

Abstract

This 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.

Suggested Citation

  • Söderlind, Paul, 2003. "C-CAPM and the Cross-Section of Sharpe Ratios," SIFR Research Report Series 18, Institute for Financial Research.
    • Handle: RePEc:hhs:sifrwp:0018
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    References listed on IDEAS

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    More about this item

    Keywords

    Cosumption-based asset pricing; habit persistence; recursive utility; idiosyncratic risk; multivariate GARCH;
    All these keywords.

    JEL classification:

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

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