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Revisiting the Implications of Heterogeneity in Financial Market Participation for the C-CAPM

Listed author(s):
  • Monica Paiella


    (Bank of Italy, Research Department)

Recent studies have explored the possibility that accounting for limited participation in financial markets, and in the stock market in particular, might rationalize the empirical inconsistency of the Consumption-based Capital Asset Pricing Model (C-CAPM). The rational behind this stand is that if non-shareholders� consumption growth co-varies with share returns less than shareholders�, including their expenditure in the consumption measure used to test the model will be misleading. This paper reviews extensively the implications of household portfolio heterogeneity for various well-known characterizations of the empirical failure of the model, such as the inconsistency of consumption-based asset pricing factors with Hansen and Jagannathan bounds, the equity premium puzzle and the rejection of the overidentifying restrictions to the model. Specifically, it provides a unified framework of analysis, based on the US Consumer Expenditure Survey, to assess to what extent the empirical inconsistency of the C-CAPM can be attributed to the use of aggregate data that do not allow to account for limited participation in asset markets. The evidence from the analysis provides support to the view that accounting for portfolio heterogeneity improves the empirical performance of the model and helps rationalize some of the puzzling findings. However, heterogeneity in financial market participation alone does not appear to be enough to reconcile fully the theory with the empirical evidence.

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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 473.

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Date of creation: Jun 2003
Handle: RePEc:bdi:wptemi:td_473_03
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  1. Domenica J. Marchetti, 1999. "Markup and the Business Cycle: Evidence from Italian Manufacturing Branches," Temi di discussione (Economic working papers) 362, Bank of Italy, Economic Research and International Relations Area.
  2. Bonaccorsi di Patti, Emilia & Gobbi, Giorgio, 2001. "The changing structure of local credit markets: Are small businesses special?," Journal of Banking & Finance, Elsevier, vol. 25(12), pages 2209-2237, December.
  3. Piero Cipollone, 2001. "La convergenza dei salari manifatturieri in Europa," Temi di discussione (Economic working papers) 398, Bank of Italy, Economic Research and International Relations Area.
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