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.
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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:
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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)
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