Working Paper: NBER ID: w1399
Authors: N. Gregory Mankiw; Matthew D. Shapiro
Abstract: The interaction between the macroeconomy and asset markets is central to a variety of modern theories of the business cycle. Much recentwork emphasizes the joint nature of the consumption decision and the portfolio allocation decision. In this paper, we compare two formulations of the Capital Asset Pricing Model. The traditional CAPM suggests that the appropriate measure of an asset's risk is the covariance of the asset's return with the market return. The consumption CAPM, on the other hand, implies that a better measure of risk is the covariance with aggregate consumption growth. We examine a cross section of 464 stocks and find that the beta measured with respect to a stock market index outperforms the beta measured with respect to consumption growth.
Keywords: Capital Asset Pricing Model; Consumption CAPM; Market Beta
JEL Codes: G12; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| consumption CAPM (E21) | not more empirically useful than traditional CAPM (G19) |
| traditional CAPM (G19) | more consistent with the data (Y10) |
| high consumption beta stocks (E20) | do not earn a higher return (G12) |
| market beta (G10) | higher stock returns (G17) |
| consumption beta (E21) | lower predictive power than market beta (C46) |