University of British Columbia and Stanford University, respectively.
On the Distributional Conditions for a Consumption-oriented Three Moment CAPM
Article first published online: 30 APR 2012
1983 The American Finance Association
The Journal of Finance
Volume 38, Issue 5, pages 1381–1391, December 1983
How to Cite
KRAUS, A. and LITZENBERGER, R. (1983), On the Distributional Conditions for a Consumption-oriented Three Moment CAPM. The Journal of Finance, 38: 1381–1391. doi: 10.1111/j.1540-6261.1983.tb03830.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
In this paper, we develop sufficient conditions on probability distributions for a three moment (mean, variance, and skewness) consumption-oriented capital asset pricing model (CAPM) to price correctly a subset of assets. The assumptions that individuals in an allocationally efficient capital market have identical probability beliefs and monotone increasing strictly concave utility functions displaying nonincreasing absolute risk aversion imply an aggregate preference function that exhibits preference for expected return, aversion to variance of return, and preference for positive skewness. For otherwise arbitrary preferences, we show that quadratic characteristic lines are sufficient for a subset of assets to be priced according to a three moment consumption-oriented CAPM.