Consumption-Based Asset Pricing, Part 1: Classic Theory and Tests, Measurement Issues, and Limited Participation

Published

Journal Article (Review)

©2015 by Annual Reviews. All rights reserved. This article, Part 1 of 2, reviews the classical origins, development, and tests of consumption-based asset pricing theory, focusing mainly on the first two decades from 1976 to 1998. Starting with the original consumption capital asset pricing model (CCAPM) derivations, we review both theory and subsequent tests and provide some new applications. The consumption aggregation theorem and CCAPM are derived, and optimal consumption and portfolio strategies are discussed. The term structure of interest rates is derived from the term structures for expected growth, volatility, and inflation. Time aggregation biases in consumption betas as well as the usefulness of the "consumption-mimicking portfolio" are also derived. In addition to various empirical tests, models and tests of limited participation in asset markets as well as models of incomplete markets are presented. When certain measurement issues are taken into account, the CCAPM performs better than the original CAPM and nearly as well as the Fama-French three-factor model.

Full Text

Duke Authors

Cited Authors

  • Breeden, DT; Litzenberger, RH; Jia, T

Published Date

  • December 7, 2015

Published In

Volume / Issue

  • 7 /

Start / End Page

  • 35 - 83

Electronic International Standard Serial Number (EISSN)

  • 1941-1375

International Standard Serial Number (ISSN)

  • 1941-1367

Digital Object Identifier (DOI)

  • 10.1146/annurev-financial-111914-041800

Citation Source

  • Scopus