Consumption-Based CAPM with Belief Heterogeneity

30 Pages Posted: 22 Aug 2014 Last revised: 12 Feb 2016

See all articles by Lei Shi

Lei Shi

Macquarie University; Financial Research Network (FIRN)

Date Written: December 15, 2015

Abstract

This paper finds that the risk-return relationship of the consumption-based CAPM is robust to the heterogeneity in agents’ beliefs. First, the effect of disagreement cancels out in the limit as risk tolerance approaches zero. Second, although low risk aversion and large disagreement can significantly distort the security market line (SML) and the effect is amplified in a dynamic model, per capita volatility of consumption growth is implausibly high compared to empirical estimates from microeconomic data. Third, increasing risk aversion and lowering disagreement levels can help to reduce per capita volatility, however the impact of disagreement on the SML also become negligible.

Keywords: heterogeneity in beliefs; CCAPM; risk-return relationship

JEL Classification: G12, D53, D84

Suggested Citation

Shi, Lei, Consumption-Based CAPM with Belief Heterogeneity (December 15, 2015). Journal of Economic Dynamics and Control, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2485003 or http://dx.doi.org/10.2139/ssrn.2485003

Lei Shi (Contact Author)

Macquarie University ( email )

New South Wales 2109
Australia
+612 98508478 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
53
Abstract Views
555
Rank
681,640
PlumX Metrics