The Consumption Risk of the Stock Market

Abstract
About twenty years ago, the consumption-based capital asset pricing model took center stage in discussions of asset pricing and economic fluctuations. Since then many economists have puzzled about the economy's most important risk premium, the spread between the equity return and the risk-free return. According to the model, the right measure of risk is consumption risk, but the measured consumption risk associated with the stock market seems too small to explain an equity premium of 6 percentage points, unless consumers are extraordinarily risk averse.

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