Campbell, JohnCochrane, John2009-07-102000Campbell, John Y., and John H. Cochrane. 2000. Explaining the poor performance of consumption-based asset pricing models. Journal of Finance 55(6): 2863-2878.0022-1082http://nrs.harvard.edu/urn-3:HUL.InstRepos:3163265We 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.en-US10.1111/0022-1082.00310