The CAPM is a special case of the more general consumption-based CAPM. This study addresses the question whether the consumption-based CAPM with constant relative risk aversion (CRRA) preferences and lognormal dividends can theoretically explain some of the stylized facts, which the more restrictive CAPM struggles to explain: the premium on low-beta stocks, the size premium and the value premium. A class of economies in the CRRA-lognormal framework is examined that explains these stylized facts and can be solved in closed form. The comparative statics suggest that cross-sectional anomalies are closely linked to the equity premium puzzle.

Discussant: Zhenzhen Fan (University of Amsterdam)