Asset Pricing Models with and without Consumption: An Empirical Evaluation

The paper evaluates the ability of asset pricing models that do not use consumption data, and models that use consumption data as a proxy for true consumption, to explain the time-series and cross-sectional variation of expected returns of portfolios of stocks. Although some parameter restrictions are rejected by models that do not use consumption data, we find that they provide economically meaningful estimates of the representative agent's preference parameters and fit the data slightly better than models which use consumption data to proxy true consumption. Models without consumption data are also not rejected when they are augmented to account for the 'size' effect.