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Grammig, Joachim G.
Schrimpf, Andreas
Year of Publication: 
Series/Report no.: 
ZEW Discussion Papers No. 06-032
This paper presents an empirical evaluation of recently proposed asset pricing models which extend the standard preference specification by a reference level of consumption. The novelty is that we use a broad cross-section of test assets, which provides a level playing field for a comparison to well-established benchmark models. We also motivate a specification that accounts for the return on human capital as a determinant of the reference level. We find that this extension does a good job in explaining the cross-sectional variation in average returns across the 25 Fama- French portfolios with pricing errors close to those of Lettau/Ludvigson's celebrated scaled factor models.
Consumption-based Asset Pricing
Cross-Section of Stock Returns
Reference Level
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Working Paper

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