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Title: A Theoretical Extension of the Consumption-based CAPM Model
Authors: Li, Jingyuan
Dionne, Georges
Keywords: Consumption-based CAPM
Risk Premium
Equity premium puzzle
Issue Date: 2010-12
Series/Report no.: Cahiers du CIRPÉE;10-47
Abstract: 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.
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