Consumer Asset Pricing Model Based on Heterogeneous Consumers and the Mystery of Equity Premium

Yan, Yu and Wang, Yiming (2020): Consumer Asset Pricing Model Based on Heterogeneous Consumers and the Mystery of Equity Premium.

Abstract

As one of the core models of finance, the consumer capital asset pricing model (CCAPM) has produced the puzzle of equity premium. In order to explain this problem and get a more realistic pricing formula, this paper uses constant absolute risk aversion coefficient (Cara) utility function and introduces heterogeneous consumers to improve the original model, and finally gets a more effective form and there is no original puzzle in this form. At the end of the article, the American data are used to verify the results. The regression results support this model very well.

• Item Type: MPRA Paper
• Language: English
• Keywords: CAPM;CARA;puzzle of equity premium
• Subjects: G - Financial Economics > G0 - General > G00 - General

References

[1] Aase K K. Recursive Utility and the Equity Premium Puzzle: A Discrete-Time Approach[J]. Social Science Electronic Publishing, 2015.

[2] Arrow K J. Essays in the Theory of Risk-Bearing[J]. Journal of Political Economy, 1972, 27(Volume 80, Number 6): 1193.

[3] Campbell J Y. Consumption-Based Asset Pricing[J]. Handbook of the Economics of Finance, 2003, 1, part 2.

[4] Cecchetti S G, Lam P S, Mark N C. The equity premium and the risk-free rate: Matching the moments[J]. Social Science Electronic Publishing, 2010, 31(1): 21-45.

[5] Constantinides G M, Duffie D. Asset pricing with heterogeneous consumers[J]. Social Science Electronic Publishing, 1992, 104(2): 219- 240.

[6] Jacobs K, Pallage S, Robe M A. Market incompleteness and the equity premium puzzle: Evidence from statelevel data[J]. Journal of Banking and Finance, 2013, 37(2): 378-388.

[7] Hansen L P, Jagannathan R. Restrictions on intertemporal marginal rates of substitution implied by asset returns[ J]. Journal of Political Economy, 1991, 99(2): 225-62.

[8] Horvath J. Macroeconomic Disasters and the Equity Premium Puzzle in High-Income and Developing Countries[ J]. Social Science Electronic Publishing, 2016.

[9] Lucas R E. Asset prices in an exchange economy[J]. Econometrica, 1978, 46(9): 1429-1445.

[10] Mehra R, Prescott E C. The equity premium: A puzzle[J]. Journal of monetary Economics, 1985, 15(2): 145-161.

[11] Piazzesi M, Schneider M, Tuzel S. Housing, consumption and asset pricing[J]. Journal of Financial Economics, 2006, 83(3):531-569.

[12] Telmer C I. Asset-pricing Puzzles and Incomplete arkets[J]. The Journal of Finance, 1993, 48(5): 1803-1832.

[13] VissingJ0rgensen A. Limited stock market participation and the equity premium puzzle[J]. 1998.

[14] Xie Y, Pantelous A A, Florackis C. Disappointment aversion and the equity premium puzzle: new international evidence[J]. The European Journal of Finance, 2016, (12): 1-15.