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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Can CRRA preferences explain CAPM-anomalies in the cross-section of stock returns? |
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| Institution | University of Zurich |
| Series Name | Swiss Finance Institute Research Paper |
| Number | 13-43 |
| Date | 2013 |
| Abstract Text | A large number of empirical studies find evidence for systematic deviations from the CAPM. The CAPM tends to understate the returns on low-beta stocks and overstate the returns on high-beta stocks, which means that the security market line is too steep. Other well-documented anomalies are the size premium and the value premium. The CAPM is a special case of the consumption-based CAPM. This study addresses the question whether the consumption-based CAPM with constant relative risk aversion preferences can explain CAPM-anomalies. An example of an economy with power utility and lognormal returns is examined that can be solved in closed form. The model leads to a security market line that is flatter than in the CAPM and generates a size and a value premium. The comparative statics suggest that cross-sectional anomalies and the equity premium puzzle are of a very similar nature. |
| Official URL | http://ssrn.com/abstract=2312273 |
| Other Identification Number | merlin-id:9172 |
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