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A Theoretical Extension of the Consumption-based CAPM Model


  • Jingyuan Li
  • Georges Dionne


We extend the Consumption-based CAPM (C-CAPM) model for representative agents with different risk attitudes. We introduce the concept of expectation dependence and show that for a risk averse representative agent, it is the first-degree expectation dependence rather than the covariance that determines C-CAPM’s riskiness. We extend the assumption of risk aversion to prudence and provide a weaker dependence condition than first-degree expectation dependence to obtain the values of asset price and equity premium. Results are generalized to higher-degree risk changes and higher- order representative agents, and are linked to the equity premium puzzle.

Suggested Citation

  • Jingyuan Li & Georges Dionne, 2010. "A Theoretical Extension of the Consumption-based CAPM Model," Cahiers de recherche 1047, CIRPEE.
  • Handle: RePEc:lvl:lacicr:1047

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    References listed on IDEAS

    1. Kais Dachraoui & Georges Dionne, 2007. "Conditions Ensuring the Decomposition of Asset Demand for All Risk-Averse Investors," The European Journal of Finance, Taylor & Francis Journals, vol. 13(5), pages 397-404.
    2. Franco Pellerey & Patrizia Semeraro, 2005. "A Note on the Portfolio Selection Problem," Theory and Decision, Springer, vol. 59(4), pages 295-306, December.
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    More about this item


    Consumption-based CAPM; Risk premium; Equity premium puzzle;

    JEL classification:

    • D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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