Title: Quantile consumption-capital asset pricing model
Authors: Helena Veiga - BRU-IUL (Instituto Universitario de Lisboa) (Portugal) [presenting]
Abderrahim Taamouti - Durham University Business School (United Kingdom)
Sofia Ramos - ESSEC Business School (France)
Chih-Wei Wang - National Sun Yat-sen University (Taiwan)
Abstract: The Capital Asset Pricing Model (CAPM) is a statement about the conditional mean of asset returns and doesn't say anything about other levels (quantiles) of the conditional distribution of asset returns. We examine whether the Euler equation defined by a consumption-based stochastic discount factor can also be expressed in terms of conditional quantile rather than the conditional mean. We show that replacing the standard expected utility optimization problem, which is expressed in terms of the conditional expectations, with a quantile utility optimization problem, using quantile utility function leads to an Euler equation in which the asset price is a function of the quantile of the stochastic discount factor and of payoff. Under the assumption that consumption growth rate process is log-elliptically distributed, the latter result implies that the quantiles of asset returns are functions of consumption volatility. The empirical evidence validates our theoretical results and show that consumption volatility is a driving factor of quantiles of stock market returns.