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This paper investigates the explanatory power of the long-horizon Consumption CAPM (LH-CCAPM) for explaining size and value premia in major international stock markets (US, UK and Germany). We modify the estimation approach by Parker and Julliard (2005) taking commonalities in size and book-to-market sorted portfolios into account. Our findings suggest that the long-horizon CCAPM typically delivers more plausible estimates (i.e. lower estimates of risk aversion) than the standard CCAPM. However, contrary to the results by Parker and Julliard, we find that the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. This result holds true for all stock markets considered.
Abstract
Long-Horizon Consumption Risk and the Cross-Section of Expected Returns: A Cross-Country Perspective
Grammig, Joachim; Schrimpf, Andreas; Schuppli, MichaelThis paper investigates the explanatory power of the long-horizon Consumption CAPM (LH-CCAPM) for explaining size and value premia in major international stock markets (US, UK and Germany). We modify the estimation approach by Parker and Julliard (2005) taking commonalities in size and book-to-market sorted portfolios into account. Our findings suggest that the long-horizon CCAPM typically delivers more plausible estimates (i.e. lower estimates of risk aversion) than the standard CCAPM. However, contrary to the results by Parker and Julliard, we find that the model falls short of providing an accurate description of the cross-section of returns under our modified empirical approach. This result holds true for all stock markets considered.