Publication: Explaining the Poor Performance of Consumption-Based Asset Pricing Models
Open/View Files
Date
2000
Authors
Published Version
Journal Title
Journal ISSN
Volume Title
Publisher
Blackwell Publishing
The Harvard community has made this article openly available. Please share how this access benefits you.
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.
Research Data
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.
Description
Other Available Sources
Keywords
Terms of Use
This article is made available under the terms and conditions applicable to Other Posted Material (LAA), as set forth at Terms of Service