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Estimation of the consumption CAPM with imperfect sample separation information
Author(s) -
Semenov Andrei
Publication year - 2008
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.344
Subject(s) - capital asset pricing model , economics , econometrics , imperfect , consumption (sociology) , stochastic discount factor , sample (material) , asset (computer security) , risk aversion (psychology) , mutual fund separation theorem , consumption based capital asset pricing model , equity premium puzzle , separation (statistics) , capital asset , statistics , financial economics , mathematics , expected utility hypothesis , computer science , finance , portfolio , social science , linguistics , philosophy , chemistry , computer security , chromatography , sociology
We propose a consumption‐based capital asset pricing model consumption (CAPM), in which the pricing kernel is calculated as the average of individuals' intertemporal marginal rates of substitution weighted by the probabilities of holding the asset in question. These probabilities are conditional on available imperfect sample separation information and are estimated simultaneously with the parameters of Euler equations. Using data from the US Consumer Expenditure Survey, we find that the consumption CAPM with probability‐weighted agents yields a more precise estimate of the agent's risk aversion compared with the model, in which the available imperfect information on asset‐holding status is erroneously regarded as a perfect sample separation indicator. Copyright © 2007 John Wiley & Sons, Ltd.