What is the Consumer Capital Asset Valuation Model (CCAPM)?
The Consumption Asset Valuation Model (CCAPM) is an extension of the Capital Asset Valuation Model (CAPM) that uses a consumer beta instead of a market beta to explain the expected return premiums over the rate. without risk. The beta component of the CCAPM and CAPM formulas represents a risk that cannot be diversified.
Key points to remember
- The CCAPM predicts that an asset’s performance premium is proportional to its consumption beta.
- Consumption beta is the coefficient of regression of an asset’s returns and consumption growth, where the CAPM’s market beta is the coefficient of regression of an asset’s returns over the returns of the market portfolio.
Understanding the Consumer Fixed Asset Pricing Model (CCAPM)
Consumer beta is based on the volatility of a given stock or portfolio. The CCAPM predicts that an asset’s performance premium is proportional to its consumption beta. The model is attributed to Douglas Breeden, professor of finance at the Fuqua School of Business at Duke University, and Robert Lucas, professor of economics at the University of Chicago who won the Nobel Prize in economics in 1995.
CCAPM provides a fundamental understanding of the relationship between wealth and consumption and an investor’s risk aversion. The CCAPM works as an asset valuation model to tell you the expected premium investors need to buy a given stock, and how that return is affected by the risk resulting from consumer-induced stock price volatility.
The amount of risk associated with the consumption beta is measured by the movements of the risk premium (return on assets and risk-free rate) with the growth of consumption. CCAPM is useful for estimating how much stock returns are changing relative to consumption growth. A higher consumer beta implies a higher expected return on risky assets. For example, a consumer beta of 2.0 would imply a return on assets requirement increased by 2% if the market rose by 1%.
CCAPM integrates many forms of wealth beyond stock market wealth and provides a framework for understanding the variation in returns on financial assets over many time periods. This provides an extension of the CAPM, which only takes into account the returns of assets over a period.
The CCAPM formula is:
R=RF+??vs(Rm–RF)or:R=Expected return on a securityRF=Risk free rate??vs=Consumption betaRm=Return to the market
CCAPM vs CAPM
While the CAPM formula relies on the return of the market portfolio to predict future asset prices, the CCAPM relies on aggregate consumption. In the CAPM, the market return is generally represented by the return of the S&P 500. Risky assets create uncertainty in an investor’s wealth, which is determined in the CAPM by the market portfolio using the market beta of 1.0. The CAPM assumes that an investor cares about the market return and the variation in the return of their portfolio relative to that return benchmark.
In the CCAPM formula, on the other hand, risky assets create uncertainty in the consumption– the amount that a person will spend becomes uncertain because the level of wealth is uncertain due to investments in risky assets. The CCAPM assumes that investors are more concerned with how their portfolio returns vary relative to a different benchmark than the overall market.