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

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  • Joachim Grammig
  • Andreas Schrimpf

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‐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.

Suggested Citation

  • Joachim Grammig & Andreas Schrimpf, 2009. "Asset pricing with a reference level of consumption: New evidence from the cross‐section of stock returns," Review of Financial Economics, John Wiley & Sons, vol. 18(3), pages 113-123, August.
  • Handle: RePEc:wly:revfec:v:18:y:2009:i:3:p:113-123
    DOI: 10.1016/j.rfe.2009.04.004
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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