A Jump/Diffusion Consumption-Based Capital Asset Pricing Model and the Equity Premium Puzzle
This paper derives the equilibrium excess returns on risky assets in an exchange economy where the underlying exogenous uncertainty is a combination of a pure multidimensional jump process and a diffusion model. We derive closed-form solutions for the interest rate and the risk premiums on risky assets for a traditional class of separable utility indices. Our analysis demonstrates that when the underlying jumps of the aggregate consumption process are not negligible, then the traditional form of the consumption-based capital asset princing model need not hold and the asset risk premiums may be larger than predicted by the traditional CCAPM in continuous time, based on pure It� diffusion processes. Our analysis suggests an explanation for the large estimates of the risk premiums reported in empirical tests of the single-beta CCAPM. Copyright 1993 Blackwell Publishers.
Volume (Year): 3 (1993)
Issue (Month): 2 ()
|Contact details of provider:|| Web page: http://www.blackwellpublishing.com/journal.asp?ref=0960-1627|
|Order Information:||Web: http://www.blackwellpublishing.com/subs.asp?ref=0960-1627|
When requesting a correction, please mention this item's handle: RePEc:bla:mathfi:v:3:y:1993:i:2:p:65-84. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.