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An Alternative Testable Form of the Consumption CAPM
Author(s) -
KAZEMI HOSSEIN B.
Publication year - 1988
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1988.tb02588.x
Subject(s) - consumption (sociology) , economics , aggregate (composite) , asset (computer security) , capital asset pricing model , econometrics , microeconomics , flexibility (engineering) , general equilibrium theory , computer science , social science , materials science , computer security , management , sociology , composite material
This paper develops a consumption‐oriented model of asset prices in a multigood economy that is, in principle, testable even when aggregate consumption of goods and their market prices are only partially observable. Previous studies show that, when there are m consumption goods, equilibrium expected excess returns on securities are functions of their covariances with m + 1 variables—aggregate consumption expenditure and market prices of consumption goods. Without making any further assumptions, the present model shows that a similar equilibrium relationship can be expressed in terms of covariances of asset returns with the following m + 1 variables: market prices of k consumption goods and aggregate consumption of m + 1 − k goods. Because the author's result provides researchers with some flexibility in choosing the set of m + 1 variables that measure riskiness of securities, it should lead to more powerful tests of the model.