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Don't break the habit: structural stability tests of consumption asset pricing models in the UK

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  • Stuart Hyde
  • Mohamed Sherif

Abstract

This paper investigates the structural stability of four alternative consumption based asset pricing models, the traditional power utility consumption based capital asset pricing model (C-CAPM), the recursive preferences model proposed by Epstein and Zin (1989, 1991), and two habit formation specifications, the form proposed by Abel (1990) and the model of Campbell and Cochrane (1999), using the tests of Hall and Sen (1999). The ability of the models to price stocks and stocks and a short-term interest rate (i.e., the equity premium) is assessed. Evidence is found supportive of both the habit formation specifications and the traditional C-CAPM. The preferred specification based on parameter estimates and structural stability is that of Campbell and Cochrane.

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  • Stuart Hyde & Mohamed Sherif, 2005. "Don't break the habit: structural stability tests of consumption asset pricing models in the UK," Applied Economics Letters, Taylor & Francis Journals, vol. 12(5), pages 289-296.
    • Handle: RePEc:taf:apeclt:v:12:y:2005:i:5:p:289-296
    DOI: 10.1080/1350485042000338662
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    References listed on IDEAS

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    1. Abel, Andrew B, 1990. "Asset Prices under Habit Formation and Catching Up with the Joneses," American Economic Review, American Economic Association, vol. 80(2), pages 38-42, May.
    2. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
    3. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
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    1. Hall, Jamie & Pitt, Michael K. & Kohn, Robert, 2014. "Bayesian inference for nonlinear structural time series models," Journal of Econometrics, Elsevier, vol. 179(2), pages 99-111.
    2. Samih Azar, 2011. "Retesting the CCAPM Euler equations," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 7(4), pages 324-346, September.

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