CCAPM

Question 1

Father of CCAPM

Answer 1

Breeden 1979

Question 2

Lettau Ludvigson 2001 JF

Answer 2

• find that consumption, human and non-human wealth are cointegrated.
• Moreover, find that the deviation of consumption from the cointegrated trend forecasts aggregate stock returns at short and long horizons.
• Previous related models, such as Campbell (1984) dividend/price, only forecast returns at long horizons.

Question 3

Lettau Ludvigson 2001 JPE

Answer 3

• Model comprised of CAY and the MRP performs about as well as the FF3F in explaining variation in returns among the 25 size-B/M sorted portfolios.
• Includes theoretical arguments linking CAY the CCAPM. Intuition is that households adjust consumption in anticipation of Δ in aggregate wealth (i.e. the market portfolio).

Question 4

Lettau Ludvigson 2004

Answer 4

• Challenges textbook finding of Modigliani (1971) that $1 incre in wealth causes 5% incr in consumption.
• Find instead that transitory Δ of wealth, such as those related to the biz cycle, lead to essentially no Δ in consumption.
• Rather it’s permanent shocks to trend of wealth that leads to signif Δ in consumption.

Question 5

Bansal, Dittmar and Lundblad 2005

Answer 5

• Show that economic risks in CFs (“CF β”) account for a significant portion of differences in risk premia across assets.
• Measure CF β via a VAR model that includes observed CFs & aggregate consumption growth rates.

Question 6

Yogo 2006

Answer 6

• When u() nonseparable in nondurable & durable consump & elasticity of subst btw the two C goods is sufficiently high, MU rises when durable C falls.
• Small & value stks deliver relatively low R during recessions, when durable C falls –> high avg R relative to large & value stks
• Stk returns unE low at biz cycle troughs, when durable C falls sharply; explains countercyclical variation in the ERP

Question 7

Lettau and Van Nieuwerburgh 2008

Answer 7

• Find strong empiric evidence of shifts in steady state mean of the economy
• Δ in the steady state make in-sample return forecastability of adj fin ratios hard to exploit out-of-sample.
• Uncertainty of est the size of steady-state shifts rather than the estimation of their dates is responsible for the difficulty of forecasting stock returns in real time.

Question 8

Savov 2011

Answer 8

• A new measure of C, garbage, is more volatile and more correlated with stocks than the canonical measure (NIPA) consumption expenditure. A garbage-based CCAPM matches the U.S. equity premium with relative risk aversion of 17 versus 81 and evades the joint equity premium-risk-free rate puzzle. These results carry through to European data. In a cross-section of size, value, and industry portfolios, garbage growth is priced and drives out NIPA expenditure growth.