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Asset pricing with a reference level of consumption: New evidence from the cross‐section of stock returns
Author(s) -
Grammig Joachim,
Schrimpf Andreas
Publication year - 2009
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2009.04.004
Subject(s) - capital asset pricing model , econometrics , consumption based capital asset pricing model , economics , stock (firearms) , consumption (sociology) , benchmark (surveying) , financial economics , mechanical engineering , social science , geodesy , sociology , engineering , geography
Abstract This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. We motivate an alternative model that accounts for the return on human capital as a determinant of the reference level. Our analysis is based on a broad cross‐section of test assets, which provides a level playing field for a comparison to established benchmark models. The reference level model extended by human capital does a good job in explaining size and value premia. Estimated on Fama and French's size and book‐to‐market sorted portfolios, it outperforms Lettau and Ludvigson's scaled CCAPM and delivers average pricing errors comparable to the Fama–French three‐factor model.