CONSUMPTION ASSET PRICING MODELS: EVIDENCE FROM THE UK

• Published in: The Manchester school Vol. 73; no. 3; pp. 343 - 363
• Main Authors: HYDE, STUART, SHERIF, MOHAMED
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01-06-2005; University of Manchester
• Series: Manchester School
• Subjects: Asset valuation; Capital assets; Capital market; CAPM; Consumption; Data analysis; Economic theory; Empirical research; Estimation; Financial economics; Habits; Mathematical methods; Model testing; Modelling; Stock exchange; Stock returns; Studies; United Kingdom; United Kingdom > UK
• ISSN: 1463-6786; 1467-9957
• DOI: 10.1111/j.1467-9957.2005.00450.x

We analyse the ability of the consumption‐based capital asset pricing model (C‐CAPM) using traditional power utility, the recursive preferences model proposed by Epstein and Zin and two habit formation specifications proposed by Abel and Campbell and Cochrane to explain asset returns at both the economy level and, novelly, four individual sector groupings. We also investigate whether the models are capable of explaining the variation in the Fama–French factors. We find evidence supportive of both the habit formation specifications and the traditional power utility C‐CAPM. The Epstein–Zin specification is clearly rejected. The preferred specification is that of Campbell and Cochrane. Importantly, parameter estimates for the sector groupings are consistent with theory, suggesting risk aversion is the same in all sectors. However, the ability of the models to describe the behaviour of the Fama–French factors is mixed.