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

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  • Karen K. Lewis
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    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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    File URL: http://www.nber.org/papers/w3583.pdf
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    Bibliographic Info

    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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    Publication status: published as Journal of Monetary Economics Volume 28, pp. 365-389 December 1991
    Handle: RePEc:nbr:nberwo:3583

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    1. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    2. Kandel, Shmuel & Stambaugh, Robert F, 1990. "Expectations and Volatility of Consumption and Asset Returns," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 207-32.
    3. 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.
    4. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
    5. Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics 12, Federal Reserve Bank of Minneapolis.
    6. 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.
    7. 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.
    8. Scheinkman, Jose A & LeBaron, Blake, 1989. "Nonlinear Dynamics and Stock Returns," The Journal of Business, University of Chicago Press, vol. 62(3), pages 311-37, July.
    9. Giovannini, Alberto, 1989. "Uncertainty and liquidity," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 239-258, March.
    10. Hsieh, David A, 1989. "Testing for Nonlinear Dependence in Daily Foreign Exchange Rates," The Journal of Business, University of Chicago Press, vol. 62(3), pages 339-68, July.
    11. 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.
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    Cited by:
    1. Brailsford, Timothy J. & Faff, Robert W., 1997. "Testing the conditional CAPM and the effect of intervaling: A note," Pacific-Basin Finance Journal, Elsevier, vol. 5(5), pages 527-537, December.
    2. Brailsford, Timothy J. & Josev, Thomas, 1997. "The impact of the return interval on the estimation of systematic risk," Pacific-Basin Finance Journal, Elsevier, vol. 5(3), pages 357-376, July.
    3. Karen K. Lewis, 2011. "Global asset pricing," Globalization and Monetary Policy Institute Working Paper 88, Federal Reserve Bank of Dallas.
    4. Kim, Heon-Goo & Oh, Jeong Hun, 2004. "The role of IT on the Korean economy under IMF control," Journal of Policy Modeling, Elsevier, vol. 26(2), pages 181-190, February.
    5. Paul Harrison & Harold H. Zhang, . "Cyclical Variation in the Risk and Return Relation," Computing in Economics and Finance 1997 175, Society for Computational Economics.
    6. Canova, Fabio & Marrinan, Jane, 1995. "Predicting excess returns in financial markets," European Economic Review, Elsevier, vol. 39(1), pages 35-69, January.
    7. Nucci, Francesco, 2003. "Cross-currency, cross-maturity forward exchange premiums as predictors of spot rate changes: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 27(2), pages 183-200, February.

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