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Resuscitating the C‐CAPM: empirical evidence from France and Germany
Author(s) -
Hyde Stuart,
Cuthbertson Keith,
Nitzsche Dirk
Publication year - 2005
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/ijfe.282
Subject(s) - capital asset pricing model , economics , econometrics , stochastic discount factor , stock (firearms) , habit , risk aversion (psychology) , financial economics , expected utility hypothesis , mechanical engineering , psychology , engineering , psychotherapist
In this paper we analyse whether the consumption based capital asset pricing model is consistent with asset return data from the French and German stock markets. We evaluate the performance of the C‐CAPM by applying the non‐parametric methodology of Hansen and Jagannathan and adopting five alternative specifications of utility. In addition to standard power utility we adopt the recursive preferences model proposed by Epstein and Zin. We also consider both internal and external habit formation (persistence) using the models proposed by Constantinides, Abel and Campbell and Cochrane. We evaluate our findings using the tests of Burnside and Hansen and Jagannathan. We find that the majority of models produce stochastic discount factors consistent with the data. However, high degrees of risk aversion are implied for the models to be consistent. Incorporating habit formation only partially reduces the implied levels of risk aversion. Copyright © 2005 John Wiley & Sons, Ltd.