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

  • Grammig, Joachim
  • Schrimpf, Andreas

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-to-market 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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Article provided by Elsevier in its journal Review of Financial Economics.

Volume (Year): 18 (2009)
Issue (Month): 3 (August)
Pages: 113-123

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Handle: RePEc:eee:revfin:v:18:y:2009:i:3:p:113-123
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620170

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