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Asset ppricing with a reference level of consumption: New evidence from the cross-section of stock returns

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  • Grammig, Joachim
  • Schrimpf, Andreas

Abstract

This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. We motivate an alternative model that accounts for the return on human capital as a determinant of the reference level. Our analysis is based on a broad cross-section of test assets, which provides a level playing field for a comparison to established benchmark models. The reference level model extended by human capital does a good job in explaining size and value premia. Estimated on Fama and French's size and book-tomarket sorted portfolios, it outperforms Lettau and Ludvigson's scaled CCAPM and delivers average pricing errors comparable to the Fama-French three-factor model. --

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Bibliographic Info

Paper provided by University of Cologne, Centre for Financial Research (CFR) in its series CFR Working Papers with number 07-05.

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Date of creation: 2009
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Handle: RePEc:zbw:cfrwps:0705

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Keywords: Consumption-Based Asset Pricing; Cross-Section of Stock Returns; Reference Level;

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