What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models

Ghosh, Anisha, Julliard, Christian ORCID: 0000-0001-8177-7441 and Taylor, Alex. P (2017) What is the Consumption-CAPM missing? An information-theoretic framework for the analysis of asset pricing models. Review of Financial Studies, 30 (2). 442 – 504. ISSN 0893-9454

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Abstract

We consider asset pricing models in which the SDF can be factorized into an observable component and a potentially unobservable one. Using a relative entropy minimization approach, we nonparametrically estimate the SDF and its components. Empirically, we find the SDF has a business-cycle pattern and significant correlations with market crashes and the Fama-French factors. Moreover, we derive novel bounds for the SDF that are tighter and have higher information content than existing ones. We show that commonly used consumption-based SDFs correlate poorly with the estimated one, require high risk aversion to satisfy the bounds and understate market crash risk.

Item Type:	Article
Official URL:	http://rfs.oxfordjournals.org/
Additional Information:	© 2016 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
Date Deposited:	25 Jan 2016 11:51
Last Modified:	07 Nov 2024 17:45
Projects:	ES/K002309/1
Funders:	Economic and Social Research Council
URI:	http://eprints.lse.ac.uk/id/eprint/65131

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