The purpose of this chapter is to analyze capital asset pricing using the intertemporalconsumption model. An overview of asset pricing models university of bath. Jun 22, 2019 consumption capital asset pricing model ccapm. An overview of asset pricing models andreas krause university of bath school of management phone. Abut ten years ago, new pricing models emerged that started changing this equation. While the capm is derived in a static, oneperiod setting, the. This paper considers a consumption based asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. Samuelson award for scholarly writing on lifelong financial security, john cochranes asset pricing now appears in a revised edition that unifies and brings the science of asset pricing up to date for advanced students and professionals. Mar 27, 2017 this paper discusses the issues and controversies surrounding consumption based capital asset pricing models ccapms. Consumption based asset pricing models the discount factor representation in asset pricing. All material on this site has been provided by the respective publishers and authors.
Problem 1 consumption based capital asset pricing model. When requesting a correction, please mention this items handle. A major failing of the consumptionbased capitalasset pricing model is that asset returns have little correlation with consumption growth. The book also covers topics, such as the role of overconfidence in asset pricing modeling, relationship of the portfolio insurance with option and consumption based asset pricing models, etc. The discount factor framework also leads to a statespace geometry for meanvariance frontiers and asset pricing models. Portfolio returns exhibit more diverse and often stronger consumption correlations and the parameters of representativagent utility functions seem sto be estimated more precisely using these data. Martin lettau and sydney ludvigson 3 find that a conditional capital asset pricing model capm and a conditional consumption based model can explain the crosssection of stock returns just as well as the famafrench. The capm is an equilibrium model in a singleperiod economy. The purpose of this chapter is to analyze capital asset pricing using the intertemporal consumption model. The consumption based capital asset pricing model ccapm is a model of the determination of expected i.
He introduces students to leading theories of portfolio choice, their implications for asset prices, and empirical. Grishchenko, united states federal reserve board on. Each model consumption based, capm, multifactor, term structure, and option pricing is derived as a different specification of the discounted factor. We econometrically estimate a consumptionbased asset pricing model with stochastic internal habit and test it using the. Each modelconsumption based, capm, multifactor, term structure, and option. Pdf the consumptionbased capital asset pricing model. Ferson consumptionbased asset pricing john y campbell the equity premium in retrospect rainish mehra and edward c. In consumption based asset pricing models there are no liquidity constraints or other transaction costs, so agents can trade assets freely at each period.
Pastor and stambaugh 2002, liquidity risk and expected stock returns, working paper, chicago and wharton. Consumption based asset pricing models use marginal rates of substitution to determine the relative prices of the date, eventcontingent, composite consumption good. Even given market frictions and market incompleteness, ccapms must test their. Consumption capital asset pricing model ccapm definition. Topics in asset pricing hebrew university of jerusalem.
Buy asset pricing book online at best prices in india on. The last 15 years has brought forth an explosion of research on consumptionbased asset pricing as a leading contender for explaining aggregate stock market behavior. Cochrane abstract we show that the external habitformation model economy of campbell and cochrane 1999. Background, objectives, and prerequisite the past few decades have been characterized by an extraordinary growth in the use. An empirical investigation of consumptionbased asset pricing models with stochastic habit formation qiang dai, olesya v. Each model consumption based, capm, multifactor, term structure, and option pricing is derived as a different specification of the discount factor. Consumption based asset pricing models, the discount factor representation in asset pricing, the equity premium puzzle, the risk free rate puzzle, the epsteinzin. 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. From the fields leading authority, the most authoritative and comprehensive advancedlevel textbook on asset pricing. Data from other countries are examined to see which features of the u. Ross intertemporal asset pricing theory darrell duffle tests of multifactor pricing models, volatility bounds and portfolio performance wayne e. John jumps right in to data with the equity premium, riskfree rate, and volatility puzzles p. The chapter lists some important stylized facts that characterize us data, and relates them to recent developments in equilibrium asset pricing theory. Amazon with aws and numerous software as a service saas vendors most notably salesforce have brought two powerful changes.
See general information about how to correct material in repec for technical questions regarding this item, or to correct its authors, title. Cochrane traces the pricing of all assets back to a single ideaprice equals expected discounted payoffthat captures the. This section contains free ebooks and guides on investments, some of the resources in this section can be viewed online and some of them can be downloaded. Most previous dynamic asset pricing experiments depart in significant ways from consumption based models. Asset pricing, economic fluctuations and growth, monetary economics.
Explaining the poor performance of consumptionbased asset pricing models with john y. The latest updates on stanford gsbs response to covid19. He introduces students to leading theories of portfolio choice, their implications for asset prices, and empirical patterns of risk and return in financial markets. Financial economics consumptionbased capm one could regard this low correlation as a problem for. Free investments books download ebooks online textbooks. Explaining the poor performance of consumptionbased. 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. Chapter consumptionbased asset pricing sciencedirect. Housing, consumption, and asset pricing monika piazzesi, martin schneider, selale tuzel. The recent theoretical literature is used to guide the exploration of the international data. A financial model that extends the concepts of the capital asset pricing model capm to include.
How can consumptionbased assetpricing models explain. This paper examines linear asset pricing models using aggregate consumption data which are not seasonallyadjusted. 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. Asset pricing, economic fluctuations and growth, monetary economics this paper considers a consumptionbased asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. According to the capm, the uncertainty associated with the return on the market portfolio is the sole. Topics in asset pricing lecture notes download book. Martin lettau and sydney ludvigson 3 find that a conditional capital asset pricing model capm and a conditional consumptionbased model can explain the crosssection of stock returns just as well as the famafrench. The foundations of this concept were laid by the research of robert lucas 1978 and douglas breeden 1979 the model is a generalization of the capital asset pricing model capm. From capm to market anomalies, credit risk implications for the cross section of asset returns, rational versus behavioural attributes of stylized crosssectional effects, conditional capm, conditional versus unconditional portfolio efficiency, multifactor models, interpreting factor models, machine learning methods.
Notes and references 175 part two dynamic models 8. Portfolio returns exhibit more diverse and often stronger consumption correlations and the parameters of representativagent utility functions seem sto. Much research on asset pricing fieshes out these points, a nd john y. He and modest 1995, market frictions and consumptionbased asst pricing, journal of political economy 103, 94117. Consumptionbased asset pricing models imply that, although expected.
Buy asset pricing book online at low prices in india. In consumptionbased assetpricing models there are no liquidity constraints or other transaction costs, so agents can trade assets freely at each period. Ferson consumption based asset pricing john y campbell the equity premium in retrospect rainish mehra and edward c. This is the famous paper that launched the consumptionbased model and endowmenteconomy framework. Useful as a textbook for graduate students in finance, with extensive exercises and a solutions manual available for professors, the book will also serve as an essential reference for scholars and professionals, as it includes. This research has propelled further interest in consumption based asset pricing, as well as some debate. Intertemporal asset pricing without consumption data. The last 15 years has brought forth an explosion of research on consumption based asset pricing as a leading contender for explaining aggregate stock market behavior.
Artem, 923 vayanos 1998, transaction costs and asset prices. Nonetheless, breedens model retains many of the empirical problems that beset mertons earlier version. A survey of the literature 7 perspective of individual choices, where the market values i. This has a very important implication leading to practical guidance in portfolio management and asset allocation in the global financial industry. Consumptionbased asset pricing models empirical performance. A simple consumptionbased asset pricing model and the cross. How can consumptionbased assetpricing models explain low. Asset pricing wikibooks, open books for an open world. In asset pricing and portfolio choice theory, kerry e. This approach relates asset prices to risk and time preferences, dividend payments, and other fundamental determinants of asset values. Asset pricing is a branch of financial economics that is rich in puzzles and anomalies that is, stylized empirical facts not easily explained by. Topics in asset pricing lecture notes professor doron avramov. Consumptionbased asset pricing models arizona state. Experimental test of the lucas asset pricing model the.
Arbitrage, state prices and portfolio theory philip h. This week well look at the discount factor in more detail. Even given market frictions and market incompleteness, ccapms. Consumptionbased capital asset pricing model wikipedia. 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. Each modelconsumption based, capm, multifactor, term structure, and option pricingis derived as a different specification of the discounted factor. A brief introduction to the consumption based asset. This paper discusses the issues and controversies surrounding consumptionbased capital asset pricing models ccapms. Explaining the poor performance of consumptionbased asset. Explaining the poor performance of consumptionbased asset pricing models john y. Consumptionbased asset pricing models academic web pages. While ccapms provide a chance to explain the phenomena observed in stock markets, their viability is jeopardized owing to the weak predictability of the equity premium and riskfree rate puzzles.
This book gives an overview of the most widely used theories in asset pricing and some more recent developments. The timeseries relations among expected return, risk, and bookto market. For debt, asset pricing is relatively simple, as cash flows to the owner are contractually fixed. Asset pricing program, economic fluctuations and growth program the poor performance of consumptionbased asset pricing models relative to traditional portfoliobased asset pricing models is one of the great. Financial markets and the real economy volume 18 of the international library of critical writings in financial economics, john h. We will now use the euler equation to derive an asset pricing equation. The consumptionbased capital asset pricing model stanford. Nonseparable preferences describe households concern with composition risk, that is, fluctuations in the relative share of housing in their consumption basket. The capm outperforms the consumptionbased model in artificial data from the habit persistence model used in by force of habit. 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.
Zin, 2014, sources of entropy in representative agent models, journal of finance 69, 5199. Consumptionbased general equilibrium asset pricing, pioneered by stiglitz 1970, lucas 1978, and breeden 1979, remains a workhorse model in financial economics and macrofinance. This paper considers a consumptionbased asset pricing model where housing is explicitly modeled both as an asset and as a consumption good. The consumptionbased capital asset pricing model article pdf available in econometrica 576. The consumptionbased capital asset pricing model ccapm is a model of the determination of expected i. Under general equilibrium, prices must constantly adjust to maintain the balance between supply and demand on all. He presents applications to stocks, bonds, and options. The paper also extends the equilibrium characterization of interest rates of cox. Back at last offers what is at once a welcoming introduction to and a comprehensive overview of asset pricing. Each modelconsumptionbased, capm, multifactor, term structure, and option pricingis derived as a different specification of the discount factor. Consumptionbased asset pricing models use marginal rates of substitution to determine the relative prices of the date, eventcontingent, composite consumption good.
Topics and papers transactions costs and liquidity risk acharya and pedersen 2002, asset pricing with liquidity risk, working paper, new york university. The chapter lists some important stylized facts that characterize u. Representative agent models, the equity premium puzzle, and the equity volatility puzzle i general campbell, chapter 6 andor cochrane, chapter 21. Chapter 12 advances in consumptionbased asset pricing. Housing, consumption and asset pricing sciencedirect. A brief introduction to the consumption based asset pricing.
The model is a generalization of the capital asset pricing model capm. Consumptionbased asset pricing models arizona state university. Data from other countries are examined to see which features of the us experience apply more generally. 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. The foundations of this concept were laid by the research of robert lucas 1978 and douglas breeden 1979. Apr 11, 2009 he presents applications to stocks, bonds, and options. The aim of these theories is to determine the fundamental value of an asset. Asset pricing and portfolio choice theory by kerry back. This book represents an exciting step forward in the exposition of financial.
Chapter 6 on consumption based asset pricing is likewise elegant and comprehensive. In financial decisions and markets, john campbell, one of the fields most respected authorities, provides a broad graduatelevel overview of asset pricing. The book also covers topics, such as the role of overconfidence in asset pricing modeling, relationship of the portfolio insurance with option and consumptionbased asset pricing models, etc. With that objective in mind, asset pricing models have been developed, starting with the capital asset pricing models of sharpe 1964, lintner 1965, and mossin 1966. Capm the capm of sharpe 1964, lintner 1965, and mossin 1966 originates the literature on asset pricing models. Ludvigson department of economics, new york university and nber, 19w. Additional materials for asset pricing, lecture notes, new chapters, and the online class are now moved to their own page here, or via the asset pricing link at left. Breedens demonstration that mertons multibeta capital asset pricing model can be collapsed into a singlebeta model where betas are computed with respect to aggregate consumption is an important theoretical advance.
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