The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Consumption-Based Asset Pricing Models (Theory)

  • Fatih Guvenen
  • Hanno Lustig
Reference work entry


The essential element in modern asset pricing theory is a positive random variable called ‘the stochastic discount factor’ (SDF). This object allows one to price any payoff stream. Its existence is implied by the absence of arbitrage opportunities. Consumption-based asset pricing models link the SDF to the marginal utility growth of investors – and in turn to observable economic variables – and in doing so they provide empirical content to asset pricing theory. This article discusses this class of models.


Consumption-based asset pricing models Equity premium puzzle Euler equations Sharpe ratio Stochastic discount factor 

JEL Classifications

D4 D10 G12 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Fatih Guvenen
    • 1
  • Hanno Lustig
    • 1
  1. 1.