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Estimating the Continuous Time Consumption Based Asset Pricing Model

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Author Info
Sanford J. Grossman
Angelo Melino
Robert J. Shiller

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Abstract

The consumption based asset pricing model predicts that excess yields are determined in a fairly simple way by the market's degree of relative risk aversion and by the pattern of covariances between percapita consumption growth and asset returns. Estimation and testingis complicated by the fact that the model's predictions relate to the instantaneous flow of consumption and point-in-time asset values, but only data on the integral or unit average of the consumption flow is available. In our paper, we show how to estimate the parameters of interest consistently from the available data by maximum likelihood. We estimate the market's degree of relative risk aversion and the instantaneous covariances of asset yields and consumption using six different data sets. We also test the model's overidentifying restrictions.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1643.

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Date of creation: Jun 1985
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Handle: RePEc:nbr:nberwo:1643

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This page was last updated on 2009-11-21.

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