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Should the Holding Period Matter for the Intertemporal Consumption-BasedCAPM?

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Karen K. Lewis
Abstract

Empirical studies of the restrictions implied by the intertemporal capital asset pricing model across different asset markets have found conflicting evidence. In general, restrictions from this model have been rejected over short holding periods, but not over longer holding periods such as a quarter. This paper asks whether an auxiliary assumption implicit in these tests could be responsible for the observed pattern of rejections. The auxiliary assumption requires that covariances of returns with consumption move in constant proportion over time. The paper first describes how this condition may break down within the context of a general equilibrium pricing relationship. Then, the condition is tested empirically using data on foreign exchange, bonds, and equity returns. Interestingly, the pattern of consumption covariances in foreign exchange and bonds indeed match the pattern of rejection in the intertemporal asset pricing relationship.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3583.

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Date of creation: Jan 1991
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Handle: RePEc:nbr:nberwo:3583

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  1. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July. [Downloadable!] (restricted)
  2. Lewis, Karen K, 1990. " The Behavior of Eurocurrency Returns across Different Holding Periods and Monetary Regimes," Journal of Finance, American Finance Association, vol. 45(4), pages 1211-36, September. [Downloadable!] (restricted)
  3. Domowitz, Ian & Hakkio, Craig S., 1985. "Conditional variance and the risk premium in the foreign exchange market," Journal of International Economics, Elsevier, vol. 19(1-2), pages 47-66, August. [Downloadable!] (restricted)
  4. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July. [Downloadable!] (restricted)
  5. Kandel, Shmuel & Stambaugh, Robert F, 1990. "Expectations and Volatility of Consumption and Asset Returns," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 3(2), pages 207-32. [Downloadable!] (restricted)
  6. Giovannini, Alberto, 1989. "Uncertainty and liquidity," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 239-258, March. [Downloadable!] (restricted)
  7. Giovannini, Alberto & Jorion, Philippe, 1987. "Interest rates and risk premia in the stock market and in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 6(1), pages 107-123, March. [Downloadable!] (restricted)
  8. Hsieh, David A, 1989. "Testing for Nonlinear Dependence in Daily Foreign Exchange Rates," Journal of Business, University of Chicago Press, vol. 62(3), pages 339-68, July. [Downloadable!] (restricted)
  9. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March. [Downloadable!] (restricted)
  10. Cumby, Robert E., 1990. "Consumption risk and international equity returns: some empirical evidence," Journal of International Money and Finance, Elsevier, vol. 9(2), pages 182-192, June. [Downloadable!] (restricted)
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