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Modeling Asset Premiums and the Risk-Free Rate in General Equilibrium CCAPM

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  • Valckx, Nico

Abstract

We elaborate on the consumption capital asset pricing model (CCAPM) to reveal a set of underlying forces that determine asset returns. We use generalized preferences, allow for labor-leisure choice, a broad asset portfolio, and holding international claims. A calibration of the model with US data learns that excess stock and bond returns can be replicated. At the same time, however, the risk free interest rate generally appears to be mispriced, consistent with Weil (1989). Additional results show that in general two optimal values of the intertemporal substitution parameter correspond with a specified coefficient of risk aversion. Tests that assess the dynamic properties of the model yield mixed results, but are most favorable when home bias is allowed. Copyright 2001 by Kluwer Academic Publishers

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  • Valckx, Nico, 2001. "Modeling Asset Premiums and the Risk-Free Rate in General Equilibrium CCAPM," Review of Quantitative Finance and Accounting, Springer, vol. 17(2), pages 107-126, September.
    • Handle: RePEc:kap:rqfnac:v:17:y:2001:i:2:p:107-26
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