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Resuscitating the C-CAPM: empirical evidence from France and Germany

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  • Stuart Hyde

    (Manchester Business School, University of Manchester, U.K.)

  • Keith Cuthbertson

    (CASS Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.)

  • Dirk Nitzsche

    (CASS Business School, 106 Bunhill Row, London EC1Y 8TZ, U.K.)

Abstract

In this paper we analyse whether the consumption based capital asset pricing model is consistent with asset return data from the French and German stock markets. We evaluate the performance of the C-CAPM by applying the non-parametric methodology of Hansen and Jagannathan and adopting five alternative specifications of utility. In addition to standard power utility we adopt the recursive preferences model proposed by Epstein and Zin. We also consider both internal and external habit formation (persistence) using the models proposed by Constantinides, Abel and Campbell and Cochrane. We evaluate our findings using the tests of Burnside and Hansen and Jagannathan. We find that the majority of models produce stochastic discount factors consistent with the data. However, high degrees of risk aversion are implied for the models to be consistent. Incorporating habit formation only partially reduces the implied levels of risk aversion. Copyright © 2005 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 10 (2005)
Issue (Month): 4 ()
Pages: 337-357

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Handle: RePEc:ijf:ijfiec:v:10:y:2005:i:4:p:337-357

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. Abel, A.B., 1990. "Asset Prices Under Habit Formation And Catching Up With The Joneses," Weiss Center Working Papers 1-90, Wharton School - Weiss Center for International Financial Research.
  3. Lars Peter Hansen & John Heaton & Erzo Luttmer, 1993. "Econometric Evaluation of Asset Pricing Models," NBER Technical Working Papers 0145, National Bureau of Economic Research, Inc.
  4. Stuart Hyde & Mohamed Sherif, 2005. "Consumption Asset Pricing Models: Evidence From The Uk," Manchester School, University of Manchester, vol. 73(3), pages 343-363, 06.
  5. Engsted, Tom, 1998. "Evaluating the Consumption-Capital Asset Pricing Model Using Hansen-Jagannathan Bounds: Evidence from the UK," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 291-302, October.
  6. Constantinides, George M, 1990. "Habit Formation: A Resolution of the Equity Premium Puzzle," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 519-43, June.
  7. Lars Peter Hansen & Ravi Jagannathan, 1994. "Assessing specification errors in stochastic discount factor models," Staff Report 167, Federal Reserve Bank of Minneapolis.
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Cited by:
  1. Stig V. Møller, 2007. "Habit persistence: Explaining cross sectional variation in returns and time-varying expected returns," CREATES Research Papers 2007-07, School of Economics and Management, University of Aarhus.
  2. Fanti, Luciano & Gori, Luca, 2010. "Fertility-related pensions and cyclical instability," MPRA Paper 20221, University Library of Munich, Germany.
  3. Tom Engsted & Stuart Hyde & Stig V. Møller, 2007. "Habit Formation, Surplus Consumption and Return Predictability: International Evidence," CREATES Research Papers 2007-31, School of Economics and Management, University of Aarhus.
  4. 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.
  5. Tom Engsted & Stig V. M�ller, 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.

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