Resurrecting the (C)CAPM: A Cross‐Sectional Test When Risk Premia Are Time‐Varying

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Abstract
This paper explores the ability of conditional versions of the CAPM and the consumption CAPM¤jointly the (C)CAPM¤to explain the cross-section of average stock returns. Central to our approach,is the use of the log consumption-wealth ratio as a conditioning,variable. We demonstrate that such conditional models perform far better than unconditional speciflcations, and about as well as the Fama-French three-factor model,on portfolios sorted by size and book- to-market characteristics. The conditional consumption,CAPM can account,for the difierence in returns between,low book-to-market and high book-to-market portfolios and exhibits little evidence of residual size or book-to-market efiects. (JEL G10, E21) 1,Introduction Asset pricing theory has fallen on hard times. The capital asset pricing model,(CAPM) of

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