Discussion Paper Details

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Title: C-CAPM and the Cross-Section of Sharpe Ratios

Author(s): Paul Söderlind

Publication Date: September 2003

Keyword(s): consumption-based asset pricing, habit persistence, idiosyncratic risk, multivariate GARCH and recursive utility

Programme Area(s): Financial Economics

Abstract: This Paper studies whether the consumption-based asset-pricing model can explain the cross-section of Sharpe ratios. The constant relative risk aversion (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.

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Bibliographic Reference

Söderlind, P. 2003. 'C-CAPM and the Cross-Section of Sharpe Ratios'. London, Centre for Economic Policy Research.