Abstract
For the first time in the literature, this paper extends the CCAPM to establish the empirical relations between equity premia and state-dependent consumption and market risks. These relations are derived from a flexible, yet tractable, mixture distribution admitting the existence of two regimes, rather than the usual normal distribution. Focusing on the market return, we find that the consumption and market risks are priced in each state, and the responses of expected equity premia to these risks are state dependent. Extending to various portfolio returns, we show that the responses to downside consumption risks are the most important, are almost always statistically larger than the responses to upside consumption risks, and are much larger for firms having smaller sizes and facing more financial distresses.
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