Consumption-based CAPM models: International evidence
We examine the performance of several types of the consumption-based CAPM (C-CAPM) models to explore if consumption factors matter for determining excess returns across 17 MSCI country indexes. While the classic world C-CAPM does exhibit some power in explaining cross-sectional variations of expected excess returns, the model seems to require an implausibly large coefficient of risk aversion. The more sophisticated models including the heterogeneous C-CAPM, the world surplus consumption and the habit-formation models provide more reasonable estimates and add substantial explanatory power for the variation in the cross section of excess stock returns. Our results suggest that country-specific consumption risk is not fully diversified thus implying that stock returns are related to idiosyncratic consumption risk.
Year of publication: |
2011
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Authors: | Darrat, Ali F. ; Li, Bin ; Park, Jung Chul |
Published in: |
Journal of Banking & Finance. - Elsevier, ISSN 0378-4266. - Vol. 35.2011, 8, p. 2148-2157
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Publisher: |
Elsevier |
Keywords: | C-CAPM Consumption model International financial markets Heterogeneous consumption model Habit-formation model |
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