Stock returns and consumption factors in the Australian market: Cross-sectional tests
AbstractWe test conditional consumption capital asset pricing models (CCAPMs) in the Australian equity market. The conditional variables used are Lettau and Ludvigsonâ€™s (2001a, b) consumptionâ€“wealth ratio, Campbell and Cochraneâ€™s (1999) surplus consumption ratio and Santos and Veronesiâ€™s (2006) labour income to consumption ratio. We examine the cross-sectional implications of these variables using the Famaâ€“French 25 size and book-to-market portfolios and Australian industry portfolios. The Famaâ€“MacBeth (1973) cross-sectional regressions on the 25 size/book-to-market portfolios show that the conditional models perform better than the unconditional models. However, these conditional models cannot outperform the Famaâ€“French three-factor model. The conditional CCAPM, with the labour income to consumption ratio as a scaling factor, can match more closely the performance of the Famaâ€“French three-factor model. We also find that consumption growth is non-contemporaneously related to portfolio returns.
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Bibliographic InfoArticle provided by Australian School of Business in its journal Australian Journal of Management.
Volume (Year): 36 (2011)
Issue (Month): 2 (August)
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Web page: http://www.agsm.edu.au
consumption-based CAPM; consumption-wealth ratio; surplus consumption; labour income; conditional model; asset pricing;
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