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A Theoretical Extension of the Consumption-based CAPM Model

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  • Jingyuan Li
  • Georges Dionne

Abstract

We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker dependence condition than first-degree expectation dependence to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order representative agents, and are linked to the equity premium puzzle.

Suggested Citation

  • Jingyuan Li & Georges Dionne, 2010. "A Theoretical Extension of the Consumption-based CAPM Model," Cahiers de recherche 1047, CIRPEE.
    • Handle: RePEc:lvl:lacicr:1047
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    More about this item

    Keywords

    Consumption-based CAPM; Risk premium; Equity premium puzzle;
    All these keywords.

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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