Estimating C-CAPM and the Equity Premium over the Frequency Domain
In this paper we estimate the single-factor Consumption Capital Asset Pricing Model (C-CAPM) over the frequency domain. We modify the standard two-step methodology (Fama and French, 1992) to account for the spectral properties of consumption risk and we find that its lower frequencies explain up to 98% of the cross-sectional variation of expected returns and that the equity premium puzzle is eliminated. These results are robust to the definitions of the variables, the sample span and the set of portfolios utilized, and the maturity of interest rates.
|Date of creation:||28 Jun 2012|
|Date of revision:|
|Publication status:||Forthcoming in Studies in Nonlinear Dynamics & Econometrics|
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- Jonathan A. Parker & Christian Julliard, 2003. "Consumption Risk and Cross-Sectional Returns," NBER Working Papers 9538, National Bureau of Economic Research, Inc.
- Nicolae B. Gârleanu & Stavros Panageas & Jianfeng Yu, 2009. "Technological Growth and Asset Pricing," NBER Working Papers 15340, National Bureau of Economic Research, Inc.
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- Berkowitz, Jeremy, 2001. "Generalized spectral estimation of the consumption-based asset pricing model," Journal of Econometrics, Elsevier, vol. 104(2), pages 269-288, September.
- John Cochrane, 2005.
"Financial Markets and the Real Economy,"
NBER Working Papers
11193, National Bureau of Economic Research, Inc.
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