Explaining the Poor Performance of Consumption-Based Asset Pricing Models

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Explaining the Poor Performance of Consumption-Based Asset Pricing Models

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Title: Explaining the Poor Performance of Consumption-Based Asset Pricing Models
Author: Campbell, John; Cochrane, John

Note: Order does not necessarily reflect citation order of authors.

Citation: Campbell, John Y., and John H. Cochrane. 2000. Explaining the poor performance of consumption-based asset pricing models. Journal of Finance 55(6): 2863-2878.
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Abstract: We show that the external habit-formation model economy of Campbell and Cochrane (1999) can explain why the Capital Asset Pricing Model (CAPM) and its extensions are betterapproximate asset pricing models than is the standard onsumption-based model. The model economy produces time-varying expected eturns, tracked by the dividend–price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture. Therefore, though the consumption-based model and CAPM are both perfect conditional asset pricing models, the portfolio-based models are better approximate unconditional asset pricing models.
Published Version: http://dx.doi.org/10.1111/0022-1082.00310
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3163265

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  • FAS Scholarly Articles [7106]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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