A Re-examination of the Consumption-based Capital Asset Pricing Model: The Case of US and Japan

This paper re-tests the classic consumption-based capital asset pricing model (CCAPM) by extending US quarterly samples and adding the Japanese case. Using the generalized method of moments (GMM) methodology developed by Hansen and Singleton (1982), we obtain the following findings. (1) First, in the case of the CCAPM with consumption for nondurable goods in the US, the discount rate parameters generally show plausible values; however, the risk aversion parameters show unstable values in general. Further, by the J-tests, the estimated CCAPMs with consumption for nondurable goods in the US are always supported. (2) Second, in the case of the CCAPM with consumption for nondurable goods and services in the US, although the parameters of discount rate generally show plausible values, the risk aversion parameters are unstable. In addition, judging the results of the J-tests, all estimated CCAPMs with consumption for nondurable goods and services in the US are supported. (3) Finally, as for the CCAPM with private final consumption expenditures in Japan, the parameters of discount rate take plausible values; on the other hand, the risk aversion parameter values are unstable in general. Regarding the model validity, our estimated CCAPMs for Japan are mostly supported by the J-tests.