Chapter 10

The Consumption Capital Asset Pricing Model

The CAPM and the Arrow-Debreu pricing theories were essentially static in nature. The Consumption Capital Asset Pricing Model, the exclusive focus of the present chapter, extends asset pricing theory to allow for the trading of assets period by period as new information becomes available. Under the consumption capital asset pricing perspective, it is the properties of an economy’s equilibrium per-capita consumption series that ultimately determine asset prices and rates of return. The ability of this model class to replicate the historical aggregate stock market return premium above the risk free rate is discussed in detail.

Keywords

Arrow–Debreu model; Consumption Capital Asset Pricing Model ...

Get Intermediate Financial Theory, 3rd Edition now with O’Reilly online learning.

O’Reilly members experience live online training, plus books, videos, and digital content from 200+ publishers.