Equity premia and state-dependent risks

•A CCAPM with mixture distribution is used to evaluate the prices of risks.•The prices of downside risks are larger than those for upside risks.•The prices of downside consumption risks are the most frequently significant ones.•The prices of downside consumption risks are larger for smaller firms.

This paper evaluates the empirical relations between equity premia and state-dependent consumption and market risks. These relations are derived by combining the baseline CCAPM with a flexible mixture distribution that admits two regimes. We find that the response of the market equity premium to each risk is significant and state dependent. We also show, from various portfolio returns, that the responses to downside consumption risks are the most frequently significant ones, are often statistically larger than the responses to upside consumption risks, and tend to be larger for firms having smaller sizes and facing more financial distresses.