Apr 20, 2015 the consumption based model is not as bad as you think. What is the abbreviation for consumption based capital asset pricing model. The beta component of both the ccapm and capm formulas represents risk that cannot be diversified away. The consumptionbased capital asset pricing model ccapm is a model of the determination of expected i. Simply put, the returns on small stocks and value stocks are more procyclical, explaining their high average returns. Written by a major contributor to the economics of financial markets, financial decisions and markets is a comprehensive, insightful, and authoritative graduatelevel introduction to asset pricing.
Consumptionbased capital asset pricing model wikipedia. The paper also extends the equilibrium characterization of interest rates of cox. This is one of several prominent pricing models in cloud computing services and other types of. This model class is characterized by a stochastic discount factor process that puts restrictions on the joint process of asset returns and per capita consumption. Explaining the poor performance of consumptionbased. Consumptionbased general equilibrium asset pricing, pioneered by stiglitz 1970, lucas 1978, and breeden 1979, remains a workhorse model in. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumptionbased model and the capm are equivalent and perfect conditional asset pricing models. A consumption based pricing model relies on the fundamental philosophy that customers pay according to the amounts of services that they use or consume. In studying the consumption based dynamic asset pricing theory we have first presumed that there is an exogenously given dividend stream which is equal to the consumption stream of the agent whose utility function could take on different forms. This is the famous paper that launched the consumptionbased model and endowmenteconomy framework. This book gives an overview of the most widely used. Motivated by the investment model, i show that investment and pro tability convey useful information.
The consumption based model is not as bad as you think. Consumptionbased model and overview an investor must decide how much to save and how much to consume, and what portfolio of assets to hold. Chapter consumption based asset pricing john y campbell harvard university and nber contents abstract 804 keywords 804 1 introduction 805 2 international stock market data 810 3 the equity premium puzzle 816 3. Cochrane abstract we show that the external habitformation model economy of campbell and cochrane 1999. In consumptionbased assetpricing models there are no liquidity constraints or other transaction costs, so agents can trade assets freely at each period. In financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. The consumption based capital asset pricing model by darrell duffie and william zame1 the paper provides conditions on the primitives of a continuoustime economy under which there exist equilibria obeying the consumption based capital asset pricing model ccapm. A brief introduction to the consumption based asset pricing. The foundations of this concept were laid by the research of robert lucas 1978 and douglas breeden 1979. Investmentbased asset pricing cochrane 1991, 1996 is a useful approach to understanding the crosssection of asset prices and returns. We derive and test a consumptionbased intertemporal asset pricing model in which an asset earns a risk premium if it performs poorly when expected future consumption growth deteriorates. A consumptionbased asset pricing model with accounting.
Consumptionbased asset pricing models use marginal rates of substitution to determine the relative prices of the date, eventcontingent, composite consumption good. I examine if the market tail risk can be the conditioning information for consumptionbased asset pricing model. Therefore, though the consumption based model and capm are both perfect conditional asset pricing models, the portfolio based models are better approximate unconditional asset pricing models. A financial model that extends the concepts of the capital asset pricing model capm to include the amount that an individual or firm wishes to. A consumption based explanation of expected stock returns 541 higher than the eis. This is one of several prominent pricing models in cloud computing services and other types of it vendor services. A simple consumption based asset pricing model and the crosssection of equity returns robert f. Explaining the poor performance of consumptionbased asset. Dec 19, 2005 the model is, however, directly linked to current valuation studies in the accounting literature, and can be considered a dataacceptable consumption based ohlson model. Chapter consumptionbased asset pricing sciencedirect. John jumps right in to data with the equity premium, riskfree rate, and volatility puzzles p. The model is a generalization of the capital asset pricing model capm. Data from other countries are examined to see which features of the u. Ccapm abbreviation stands for consumption based capital asset pricing model.
This book stresses the interplay between theory, econometrics, and. Consumptionbased asset pricing models researchgate. There have been many models developed for different situations, but correspondingly, these stem from general equilibrium asset pricing or rational asset pricing 2, the latter. Agents care about the composition of a consumption basket that contains shelter and other goods. The model is, however, directly linked to current valuation studies in the accounting literature, and can be considered a dataacceptable consumptionbased ohlson model. Consumptionbased asset pricing models arizona state university. Consumptionbased asset pricing models empirical performance. Themarginalutility loss of consuming a little less todayand buying a little more of the asset. A financial model that extends the concepts of the capital asset pricing model capm to include. Investment based asset pricing cochrane 1991, 1996 is a useful approach to understanding the crosssection of asset prices and returns. A consumptionbased pricing model relies on the fundamental philosophy that customers pay according to the amounts of services that they use or consume. The predictability of consumption growth combined with the recursive preference delivers news about future consumption growth an additional risk factor, in. Consumption based general equilibrium asset pricing, pioneered by stiglitz 1970, lucas 1978, and breeden 1979, remains a workhorse model in financial economics and macrofinance.
Each modelconsumption based, capm, multifactor, term structure, and option pricingis derived as a different specification of the discounted factor. This approach aims to determine the price of a capital asset in terms of an investors intertemporal choice of his future consumption as in the case of retirement planning and social security contributions. The predictability of consumption growth combined with the re. What is the abbreviation for consumptionbased capital asset pricing model. Consumption based asset pricing models use marginal rates of substitution to determine the relative prices of the date, eventcontingent, composite consumption good. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumption based model and the capm are equivalent and perfect conditional asset pricing models. Each model consumption based, capm, multifactor, term structure, and option pricing is derived as a different specification of the discounted factor.
Dec 30, 2016 keywords capital asset pricing model consumption based asset pricing models elasticity of intertemporal substitution equity premium puzzle external habit habit formation heteroskedasticity imperfect risk sharing incomplete markets precautionary savings real business cycles recursive preferences representative agent risk aversion riskfree rate puzzle stochastic discount factor. From which consumptionbased asset pricing models can. Business economics capital asset pricing model research capital assets pricing model consumption economics portfolio management risk management stock prices stocks prices and rates. How can consumptionbased assetpricing models explain low. Abstract a new measure of consumption, garbage, is more volatile and more correlated with stocks than the canonical measure, national income and product accounts nipa consumption expenditure. Models that have this feature, including models with habitformation in utility heterogeneous investors, and irrational expectations, are discussed.
Keywords capital asset pricing model consumptionbased asset pricing models elasticity of intertemporal substitution equity premium puzzle external habit habit formation heteroskedasticity imperfect risk sharing incomplete markets precautionary savings real business cycles recursive preferences representative agent risk aversion riskfree rate puzzle stochastic discount factor. Estimation and test of a simple consumptionbased asset. The consumption capital asset pricing model ccapm is an extension of the capital asset pricing model capm that uses a consumption beta instead of a market beta to explain expected return premiums over the riskfree rate. Therefore, though the consumptionbased model and capm are both perfect conditional asset pricing models, the portfoliobased models are better approximate unconditional asset pricing models. An overview of asset pricing models andreas krause university of bath school of management phone. January 8, 2014 abstract we investigate the empirical performance of a simple twofactor consumption based asset pricing model for the crosssection of equity returns. Then he quickly outlines the huge literature of responses to the puzzles p. Experimental test of the lucas asset pricing model the. We will now use the euler equation to derive an asset pricing equation. The discount factor framework also leads to a statespace geometry for meanvariance frontiers and asset pricing models. While the capm is derived in a static, oneperiod setting, the ccapm uses a more realistic, multipleperiod setup. This book gives an overview of the most widely used theories in asset pricing and. The chapter argues that to make sense of asset market behavior one needs a model in which the market price of risk is high, timevarying, and correlated with the state of the economy. This week well look at the discount factor in more detail.
An overview of asset pricing models university of bath. Model 2 supplements the excess market return with size and book tomarket factors fama and french 1993. Jun 22, 2019 consumption capital asset pricing model ccapm. The failure of consumption based asset pricing models to match thestochastic properties of the equity premium and the riskfree ratehas been attributed by some authors to frictions, transaction. The presence of composition risk increases the mean and. The asset prices we discuss would include prices of bonds and stocks, interest rates, exchange rates, and derivatives of all these underlying. A brief introduction to the consumption based asset pricing model ccapm we have seen that capm identifies the risk of any security as the covariance between the securitys rate of return and the rate of return on the market portfolio. A simple consumptionbased asset pricing model and the cross. January 8, 2014 abstract we investigate the empirical performance of a simple twofactor consumptionbased asset pricing model for the crosssection of. According to the capm, the uncertainty associated with the return on the market portfolio is the sole.
The purpose of this chapter is to analyze capital asset pricing using the intertemporalconsumption model. The purpose of this chapter is to analyze capital asset pricing using the intertemporal consumption model. A simple consumptionbased asset pricing model and the crosssection of equity returns robert f. The rst chapter incorporates its insights into mutual fund performance evaluation. Ccapm abbreviation stands for consumptionbased capital asset pricing model. This paper compares consumptionbased asset pricing models on the basis of whether they can improve the forecast accuracy of investors who try to predict the equity premium outofsample with valuation ratios. Epsteinzinweil utility, loglinear approximations, accounting based asset pricing, ohlson model. The consumption based capital asset pricing model ccapm is a model of the determination of expected i. Chapter 6 on consumption based asset pricing is likewise elegant and comprehensive. The capm model deals with the question of how asset prices and yields are determined, under the hypothesis that the riskfree interest rate and market return are variables determined outside the model.
The failure of consumptionbased asset pricing models to match thestochastic properties of the equity premium and the riskfree ratehas been attributed by some authors to. Introduction to asset pricing theory the theory of asset pricing is concerned with explaining and determining prices of. Chapter consumptionbased asset pricing john y campbell harvard university and nber contents abstract 804 keywords 804 1 introduction 805 2 international stock market data 810 3 the equity premium puzzle 816 3. Ccapm consumptionbased capital asset pricing model. However, the model economy also produces timevarying expected returns, tracked by the dividendprice ratio. Estimation and test of a simple consumptionbased asset pricing model byoungkyu min abstract we derive and test a consumptionbased intertemporal asset pricing model in which an asset earns a risk premium if it performs poorly when expected future consumption growth deteriorates. How can consumptionbased assetpricing models explain. Consumption is the ultimate objective of investment. The consumptionbased capital asset pricing model by darrell duffie and william zame1 the paper provides conditions on the primitives of a continuoustime economy under which there exist equilibria obeying the consumptionbased capital asset pricing model ccapm. A garbagebased consumption capital asset pricing model. He presents applications to stocks, bonds, and options. A consumptionbased explanation of expected stock returns. Growth theory has been concerned with achieving higher per capita.
This book stresses the interplay between theory, econometrics, and empirics, the hallmark of john campbells research. First, small stocks and value stocks have higher durable consumption betas than big stocks and growth stocks. Monika piazzesi, martin schneider, and selale tuzel may 2003 abstract this paper builds an equilibrium asset pricing model with housing consumption. Problem 1 consumption based capital asset pricing model.
Consumption based asset pricing models springerlink. Epsteinzinweil utility, loglinear approximations, accountingbased asset pricing, ohlson model. The chapter lists some important stylized facts that characterize u. Estimation and test of a simple consumption based asset pricing model byoungkyu min abstract we derive and test a consumption based intertemporal asset pricing model in which an asset earns a risk premium if it performs poorly when expected future consumption growth deteriorates. Financial economics consumptionbased capm low correlation of consumption growth with asset returns a major failing of the consumptionbased capitalasset pricing model is that asset returns have little correlation with consumption growth. Consumption capital asset pricing model ccapm definition. A simple consumptionbased asset pricing model and the. A consumptionbased explanation of expected stock returns 541 higher than the eis. Model 1 is a onefactor model that uses the excess return on the valueweighted market index, which corresponds to the standard capital asset pricing model capm. Modelbased priors are derived from three prominent consumptionbased asset pricing models.
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