Resurrecting the (c)CAPM
Subtitle: a cross-sectional test when risk premia are time-varying
By: Martin Lettau and Sydney Ludvigson.
Contributors: Ludvigson, Sydney C., 1964-; Federal Reserve Bank of New York.
Series: Staff reports ;; no. 93; Staff reports (Federal Reserve Bank of New York : Online) ;; no. 93.
Publisher: Federal Reserve Bank of New York
Published: 1999
Place of publication: [New York, N.Y.]
Language: eng
Format: Electronic resource
Subjects: Capital assets pricing model.
Description: "This paper explores the ability of theoretically based asset pricing models such as the CAPM and the consumption CAPM-referred to jointly as the (C)CAPM--to explain the cross-section of average stock returns.  Unlike many previous empirical tests of the (C)CAPM, we specify the pricing kernel as a conditional linear factor model, as would be expected if risk premia vary over time.  Central to our approach is the use of a conditioning variable which proxies for fluctuations in the log cumption-aggregate wealth ratio and is likely to be important for summarizing conditional expectations of excess returns.  We demonstrate that such conditional factor models are able to explain a substantial fraction of the cross-sectional variation in portfolio returns.  These models perform much better than unconditional (C)CAPM specifications, and about as well as the three-factor Fama-French model on portfolios sorted by size and book-to-market ratios.  This specification of the linear conditional consumption CAPM, using aggregate consumption data, is able to account for the difference in returns between low book-to-market and high book-to-market firms and exhibits little evidence of residual size or book-to-market effects"--Federal Reserve Bank of New York web site.
Notes: Includes bibliographical references.
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Mode of access: World Wide Web.