SIFR Research Report Series, Institute for Financial Research
C-CAPM and the Cross-Section of Sharpe Ratios
Abstract: This paper studies if the consumption-based asset pricing
model can explain the cross-section of Sharpe ratios. The CRRA model and
several extensions (habit persistence, recursive utility and idiosyncratic
shocks) all imply that the Sharpe ratio is linearly increasing in the
asset's correlation with aggregate consumption growth. Results from
quarterly data on 40 US portfolios (1947-2001) and 10 international
portfolios (1957/1971-2001) suggest that both the unconditional and
conditional C-CAPM have serious problems: there is a great deal of
variation in Sharpe ratios, but most portfolios have relatively similar and
low correlations with aggregate consumption growth.
Keywords: Cosumption-based asset pricing; habit persistence; recursive utility; idiosyncratic risk; multivariate GARCH; (follow links to similar papers)
JEL-Codes: G12; (follow links to similar papers)
17 pages, August 15, 2003
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