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Consumption Asset Pricing Models: Evidence From The Uk

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  • STUART HYDE
  • MOHAMED SHERIF

Abstract

We analyse the ability of the consumption‐based capital asset pricing model (C‐CAPM) using traditional power utility, the recursive preferences model proposed by Epstein and Zin and two habit formation specifications proposed by Abel and Campbell and Cochrane to explain asset returns at both the economy level and, novelly, four individual sector groupings. We also investigate whether the models are capable of explaining the variation in the Fama–French factors. We find evidence supportive of both the habit formation specifications and the traditional power utility C‐CAPM. The Epstein–Zin specification is clearly rejected. The preferred specification is that of Campbell and Cochrane. Importantly, parameter estimates for the sector groupings are consistent with theory, suggesting risk aversion is the same in all sectors. However, the ability of the models to describe the behaviour of the Fama–French factors is mixed.

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  • Stuart Hyde & Mohamed Sherif, 2005. "Consumption Asset Pricing Models: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(3), pages 343-363, June.
    • Handle: RePEc:bla:manchs:v:73:y:2005:i:3:p:343-363
    DOI: 10.1111/j.1467-9957.2005.00450.x
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    Cited by:

    1. Bin Li & Benjamin Liu & Eduardo Roca, 2010. "An Empirical Investigation of Consumption CAPMs in the Australian Market," Discussion Papers in Finance finance:201011, Griffith University, Department of Accounting, Finance and Economics.
    2. Stuart Hyde & Keith Cuthbertson & Dirk Nitzsche, 2005. "Resuscitating the C-CAPM: empirical evidence from France and Germany," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 337-357.
    3. Auer Benjamin R., 2012. "Lassen sich CAPM, HCAPM und CCAPM durch konsumbasierte zeitvariable Parameterspezifikation rehabilitieren? / Can Time-varying Parameter Specification Based on Consumption Variables Rehabilitate CAPM, ," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 232(5), pages 518-544, October.
    4. Stuart Hyde & Mohamed Sherif, 2005. "Don't break the habit: structural stability tests of consumption asset pricing models in the UK," Applied Economics Letters, Taylor & Francis Journals, vol. 12(5), pages 289-296.
    5. Bin Li & Benjamin Liu & Eduardo Roca, 2011. "Stock returns and consumption factors in the Australian market: Cross-sectional tests," Australian Journal of Management, Australian School of Business, vol. 36(2), pages 247-266, August.
    6. Møller, Stig Vinther, 2009. "Habit persistence: Explaining cross-sectional variation in returns and time-varying expected returns," Journal of Empirical Finance, Elsevier, vol. 16(4), pages 525-536, September.
    7. J. Davies & Jonathan Fletcher & Andrew Marshall, 2015. "Testing index-based models in U.K. stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 45(2), pages 337-362, August.
    8. Auer, Benjamin R. & Schuhmacher, Frank, 2016. "Do socially (ir)responsible investments pay? New evidence from international ESG data," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 51-62.
    9. Chen, Jiaqi & Sherif, Mohamed, 2016. "Illiquidity premium and expected stock returns in the UK: A new approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 458(C), pages 52-66.
    10. Tom Engsted & Stig V. Møller, 2010. "An iterated GMM procedure for estimating the Campbell-Cochrane habit formation model, with an application to Danish Stock and bond returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 15(3), pages 213-227.
    11. Hyde, Stuart & Sherif, Mohamed, 2010. "Consumption asset pricing and the term structure," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(1), pages 99-109, February.
    12. Madureira, Leonardo, 2007. "The ex ante real rate and inflation premium under a habit consumption model," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 355-382, June.
    13. Engsted, Tom & Hyde, Stuart & Møller, Stig V., 2010. "Habit formation, surplus consumption and return predictability: International evidence," Journal of International Money and Finance, Elsevier, vol. 29(7), pages 1237-1255, November.

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