IDEAS home Printed from https://ideas.repec.org/a/eco/journ1/2017-03-41.html
   My bibliography  Save this article

Adjusting Consumption Based Capital Asset Pricing Model within the Framework of an Open Economy: The Case of Iran

Author

Listed:
  • Jaber Bahrami

    (Student in Econometrics, University of Sistan and Baluchestan, P. O. Box 98155-987, Iran,)

  • Mosayeb Pahlavani

    (University of Sistan and Baluchestan, Iran,)

  • Reza Roshan

    (University of Persian Gulf, Iran,)

  • Saeed Rasekhi

    (University of Mazandaran, Babolsar, Mazandaran Province, Iran.)

Abstract

The purpose of this study is to investigate the relationship of some macroeconomic variables and asset returns in the framework of a theoretical and empirical consumption based capital assets pricing model (CCAPM); for this purpose, this relationship is investigated through the development of a CCAPM basic model and the importation of imported consumer goods in Epstein and Zin recursive utility function. The research sample consisted of eight portfolios and monthly data from 2003 to 2014. In the first phase, the designed pricing model parameters were estimated using Euler equations and the generalized method of moments of Hansen and Singleton; estimation of Euler equations parameters indicates economic agents are patient and risk-averse, low elasticity of substitution (ES) between domestic consumer goods and imported consumer goods, and high intertemporal ES. In the second phase, impacts of exchange rate risk premium, inflation risk premium, market return risk premium, and consumption growth risk premium on asset premium were studied using Euler linear equations as asset pricing model and Fama-MacBeth two pass regression; results show that the exchange rate risk premium, inflation risk premium and market return risk premium have had a positive impact on asset premium, i.e., economic agents will have a demand for more premium reward in asset premium so as to have more risk appetite.

Suggested Citation

  • Jaber Bahrami & Mosayeb Pahlavani & Reza Roshan & Saeed Rasekhi, 2017. "Adjusting Consumption Based Capital Asset Pricing Model within the Framework of an Open Economy: The Case of Iran," International Journal of Economics and Financial Issues, Econjournals, vol. 7(3), pages 309-317.
    • Handle: RePEc:eco:journ1:2017-03-41
    as

    Download full text from publisher

    File URL: http://www.econjournals.com/index.php/ijefi/article/download/4723/pdf
    Download Restriction: no
    File URL: http://www.econjournals.com/index.php/ijefi/article/view/4723/pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Aggarwal, Raj & Harper, Joel T., 2010. "Foreign exchange exposure of "domestic" corporations," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1619-1636, December.
    2. John Y. Campbell & John H. Cochrane, 2000. "Explaining the Poor Performance of Consumption‐based Asset Pricing Models," Journal of Finance, American Finance Association, vol. 55(6), pages 2863-2878, December.
    3. Antell, Jan & Vaihekoski, Mika, 2007. "International asset pricing models and currency risk: Evidence from Finland 1970-2004," Journal of Banking & Finance, Elsevier, vol. 31(9), pages 2571-2590, September.
    4. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    5. Bach, Christian & Møller, Stig V., 2011. "Habit-based asset pricing with limited participation consumption," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 2891-2901, November.
    6. Masao Ogaki & Carmen M. Reinhart, 1998. "Measuring Intertemporal Substitution: The Role of Durable Goods," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 1078-1098, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
    2. Elena Marquez de la Cruz & Ana Martinez-Canete & Ines Perez-Soba Aguilar, 2007. "Intertemporal preference parameters for some European monetary union countries," Applied Economics, Taylor & Francis Journals, vol. 39(8), pages 997-1011.
    3. Docherty, Paul & Chan, Howard & Easton, Steve, 2013. "Can we treat empirical regularities as state variables in the ICAPM? Evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 22(C), pages 107-124.
    4. Barroso, Pedro & Boons, Martijn & Karehnke, Paul, 2021. "Time-varying state variable risk premia in the ICAPM," Journal of Financial Economics, Elsevier, vol. 139(2), pages 428-451.
    5. Sangwon Suh & Wonho Song & Bong-Soo Lee, 2014. "A new method for forming asset pricing factors from firm characteristics," Applied Economics, Taylor & Francis Journals, vol. 46(28), pages 3463-3482, October.
    6. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    7. Francesco Chincoli & Massimo Guidolin, 2017. "Linear and nonlinear predictability in investment style factors: multivariate evidence," Journal of Asset Management, Palgrave Macmillan, vol. 18(6), pages 476-509, October.
    8. Fan, Jianqing & Ke, Yuan & Liao, Yuan, 2021. "Augmented factor models with applications to validating market risk factors and forecasting bond risk premia," Journal of Econometrics, Elsevier, vol. 222(1), pages 269-294.
    9. Kris Jacobs & Kevin Q. Wang, 2002. "Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns," CIRANO Working Papers 2002s-11, CIRANO.
    10. Marjorie Flavin & Shinobu Nakagawa, 2004. "A Model of Housing in the Presence of Adjustment Costs: A Structural Interpretation of Habit Persistence," NBER Working Papers 10458, National Bureau of Economic Research, Inc.
    11. Carlos Enrique Carrasco-Gutierrez & Wagner Piazza Gaglianone, 2012. "Evaluating Asset Pricing Models in a Simulated Multifactor Approach," Brazilian Review of Finance, Brazilian Society of Finance, vol. 10(4), pages 425-460.
    12. Keunbae Ahn, 2021. "Predictable Fluctuations in the Cross-Section and Time-Series of Asset Prices," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2021.
    13. Elena Márquez de la Cruz, 2005. "La elasticidad de sustitución intertemporal y el consumo duradero: un análisis para el caso español," Investigaciones Economicas, Fundación SEPI, vol. 29(3), pages 455-481, September.
    14. Sangwon Suh, 2018. "Portfolio Selection using New Factors based on Firm Characteristics," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 43(1), pages 77-99, March.
    15. David M. Ritzwoller & Joseph P. Romano, 2019. "Uncertainty in the Hot Hand Fallacy: Detecting Streaky Alternatives to Random Bernoulli Sequences," Papers 1908.01406, arXiv.org, revised Apr 2021.
    16. Darima Fotheringham & Michael A. Wiles, 2023. "The effect of implementing chatbot customer service on stock returns: an event study analysis," Journal of the Academy of Marketing Science, Springer, vol. 51(4), pages 802-822, July.
    17. Christiane Goodfellow & Dirk Schiereck & Steffen Wippler, 2013. "Are behavioural finance equity funds a superior investment? A note on fund performance and market efficiency," Journal of Asset Management, Palgrave Macmillan, vol. 14(2), pages 111-119, April.
    18. Chuan-Hao Hsu & Hung-Gay Fung & Yi-Ping Chang, 2016. "The performance of Taiwanese firms after a share repurchase announcement," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1251-1269, November.
    19. Kiran Paudel & Atsuyuki Naka, 2023. "Effects of size on the exchange-traded funds performance," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 474-484, October.
    20. Manuel Ammann & Philipp Horsch & David Oesch, 2016. "Competing with Superstars," Management Science, INFORMS, vol. 62(10), pages 2842-2858, October.

    More about this item

    Keywords

    Recursive Utility; Risk Aversion; Elasticity of Substitution; Consumption Based Capital Asset Pricing Model; Generalized Method of Moments;
    All these keywords.

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eco:journ1:2017-03-41. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ilhan Ozturk (email available below). General contact details of provider: http://www.econjournals.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.