Empirical Tests Of Consumption Based Asset Pricing Models Using Household Level Consumption Data
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Evaluating Asset Pricing Models with Limited Commitment Using Household Consumption Data
| Author | : Dirk Krueger |
| Publisher | : |
| Total Pages | : 28 |
| Release | : 2007 |
| Genre | : Assets (Accounting) |
| ISBN | : |
We evaluate the asset pricing implications of a class of models in which risk sharing is imperfect because of limited enforcement of intertemporal contracts. Lustig (2004) has shown that in such a model the asset pricing kernel can be written as a simple function of the aggregate consumption growth rate and the growth rate of consumption of the set of households that do not face binding enforcement constraints. These unconstrained households have lower consumption growth rates than all other households in the economy. We use household data on consumption growth from the U.S. Consumer Expenditure Survey to identify unconstrained households, to estimate the pricing kernel implied by these models and evaluate their performance in pricing aggregate risk. We find that for high values of the relative risk aversion coefficient, the limited enforcement pricing kernel generates a market price of risk that is substantially closer to the data than the one obtained using the standard complete markets asset pricing kernel.
Multifactor Consumption Based Asset Pricing Models Using the US Stock Market as a Reference
| Author | : John Hunter |
| Publisher | : |
| Total Pages | : 19 |
| Release | : 2014 |
| Genre | : |
| ISBN | : |
In this paper we extend the time series analysis to the panel frame-work to test the C-CAPM driven by wealth references for developed countries. Speciጿically, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error components. The empirical fiijndings of this two-factor model with various speciጿications all indicate that there is signiጿicant unobserved heterogeneity captured by cross-country ጿixed effects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects.
Asset Pricing Models with and Without Consumption Data
| Author | : Gikas A. Hardouvelis |
| Publisher | : |
| Total Pages | : |
| Release | : 2018 |
| Genre | : |
| ISBN | : |
This paper evaluates the ability of the empirical model of asset pricing of Campbell(1993a,b) to explain the time-series and cross-sectional variation of expected returns ofportfolios of stocks. In Campbell's model, an alternative risk-return relationship is derivedby substituting consumption out of the linearized first-order condition of the representativeagent. We compare this methodology to models that use actual consumption data, such asthe model of Epstein and Zin, 1989, 1991, and the standard consumption-based CAPM.Although we find that Campbell's model fits the data slightly better than models whichexplicitly price consumption risk, and provides reasonable estimates of the representativeagent's preference parameters, the parameter restrictions of the Campbell model, as well asits over-identifying orthogonality conditions, are generally rejected. The parameter restrictionsof the Campbell model, and the over-identifying conditions, are marginally not rejectedwhen the empirical model is augmented to account for the "size effect"
Consumption-Based Asset Pricing, Part 1
| Author | : Douglas T. Breeden |
| Publisher | : |
| Total Pages | : |
| Release | : 2015 |
| Genre | : |
| ISBN | : |
This article, Part 1 of 2, reviews the classical origins, development, and tests of consumption-based asset pricing theory, focusing mainly on the first two decades from 1976 to 1998. Starting with the original consumption capital asset pricing model (CCAPM) derivations, we review both theory and subsequent tests and provide some new applications. The consumption aggregation theorem and CCAPM are derived, and optimal consumption and portfolio strategies are discussed. The term structure of interest rates is derived from the term structures for expected growth, volatility, and inflation. Time aggregation biases in consumption betas as well as the usefulness of the “consumption-mimicking portfolio” are also derived. In addition to various empirical tests, models and tests of limited participation in asset markets as well as models of incomplete markets are presented. When certain measurement issues are taken into account, the CCAPM performs better than the original CAPM and nearly as well as the Fama-French three-factor model.
Asset Pricing with Heterogeneous Consumers and Limited Participation
| Author | : Alon Brav |
| Publisher | : |
| Total Pages | : 53 |
| Release | : 2010 |
| Genre | : |
| ISBN | : |
The Euler equations of consumption are tested on the household consumption of non-durables and services, reconstructed from the CEX database. The estimated relative risk aversion coefficient of the representative household decreases, and the estimated unexplained mean equity premium decreases, as infra marginal asset holders are eliminated from the sample. These results provide evidence of limited capital market participation. The estimated unexplained mean equity premium decreases when the assumption of complete consumption insurance is relaxed. The estimated correlation between the equity premium and the cross- sectional variance of the households' consumption growth is negative, as required, if the relaxation of market completeness is to contribute towards the explanation of the premium. The overall evidence from asset prices in favor of relaxing the assumption of complete consumption insurance is weak. An extensive Monte Carlo investigation highlights the relationship between the economic implications of limited participation and the resulting statistical properties of commonly used test statistics. The simulation results provide direct evidence relating observation error in consumption and the resulting small-sample of the test statistics.
Explaining the Poor Performance of Consumption-based Asset Pricing Models
| Author | : John Y. Campbell |
| Publisher | : |
| Total Pages | : 17 |
| Release | : 1999 |
| Genre | : Assets (Accounting) |
| ISBN | : |
The poor performance of consumption-based asset pricing models relative to traditional portfolio-based asset pricing models is one of the great disappointments of the empirical asset pricing literature. We show that the external habit-formation model economy of Campbell and Cochrane (1999) can explain this puzzle. Though artificial data from that economy conform to a consumption-based model by construction, the CAPM and its extensions are much better approximate models than is the standard power utility specification of the consumption-based model. Conditioning information is the central reason for this result. The model economy has one shock, so when returns are measured at sufficiently high frequency the consumption-based model and the CAPM are equivalent and perfect conditional asset pricing models. However, the model economy also produces time-varying expected returns, tracked by the dividend-price ratio. Portfolio-based models capture some of this variation in state variables, which a state-independent function of consumption cannot capture, and so portfolio-based models are better approximate unconditional asset pricing models
