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Evaluating the consumption‐capital asset pricing model using Hansen–Jagannathan bounds: evidence from the UK
Author(s) -
Engsted Tom
Publication year - 1998
Publication title -
international journal of finance and economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.505
H-Index - 39
eISSN - 1099-1158
pISSN - 1076-9307
DOI - 10.1002/(sici)1099-1158(199810)3:4<291::aid-ijfe87>3.0.co;2-u
Subject(s) - capital asset pricing model , stochastic discount factor , economics , econometrics , consumption (sociology) , standard deviation , consumption based capital asset pricing model , asset (computer security) , equity premium puzzle , incomplete markets , equity (law) , microeconomics , mathematics , statistics , computer science , social science , computer security , sociology , political science , law
The consumption based capital asset pricing model is evaluated using Hansen and Jagannathan (1991) bounds and 68 years of annual UK data. In contrast to the standard statistical methodology, the Hansen–Jagannathan methodology is fully non‐parametric and based on only one principle from economic theory, namely the Law of One Price . From this principle feasible regions for mean–standard deviation pairs of stochastic discount factors can be derived using asset returns data. The empirical results show that if agents are very risk‐averse, a simple time‐separable power utility version of the C‐CAPM does generate a stochastic discount factor with mean and standard deviation inside the feasible region. The UK data also display the equity premium and risk‐free rate puzzles, although to a lesser extent than has been documented for the USA. © 1998 John Wiley & Sons, Ltd.