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

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 specifications 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 difference in returns between low-book-to-market and high-book-to-market portfolios and exhibits little evidence of residual size or book-to-market effects.