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Testing The Consumption Capm With Heavy-Tailed Pricing Errors

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  • KOCHERLAKOTA, NARAYANA R.

Abstract

Many tests have rejected the implications of the consumption CAPM for data on U.S. asset returns. All of the tests, though, assume that the pricing errors satisfy the Central Limit Theorem. I provide empirical evidence that the marginal distributions of the pricing errors are so heavy-tailed that they do not satisfy the Central Limit Theorem. Using recent work on jackknifing, I construct a method of testing asset pricing models with heavy-tailed errors. Using this procedure, I find that the consumption CAPM is not rejected by annual U.S. data.

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  • Kocherlakota, Narayana R., 1997. "Testing The Consumption Capm With Heavy-Tailed Pricing Errors," Macroeconomic Dynamics, Cambridge University Press, vol. 1(3), pages 551-567, September.
    • Handle: RePEc:cup:macdyn:v:1:y:1997:i:03:p:551-567_00
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    Cited by:

    1. Alexis Akira Toda & Kieran James Walsh, 2017. "Fat tails and spurious estimation of consumption‐based asset pricing models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 32(6), pages 1156-1177, September.
    2. Toda, Alexis Akira, 2014. "Incomplete market dynamics and cross-sectional distributions," Journal of Economic Theory, Elsevier, vol. 154(C), pages 310-348.
    3. Alexis Akira Toda & Kieran Walsh, 2015. "The Double Power Law in Consumption and Implications for Testing Euler Equations," Journal of Political Economy, University of Chicago Press, vol. 123(5), pages 1177-1200.
    4. Laurian Lungu & Patrick Minford, 2006. "Explaining The Equity Risk Premium," Manchester School, University of Manchester, vol. 74(6), pages 670-700, December.

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