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Capital Asset Pricing Model and Stochastic Volatility: A Case study of India

Ka Wai Terence Fung, Ender Demir and Lu Zhou

MPRA Paper from University Library of Munich, Germany

Abstract: Bansal and Yaron (2004) demonstrate, by calibration, that the Consumption-Based Capital Asset Pricing Model (CCAPM) can be rescued by assuming that consumption growth rate follows a stochastic volatility model. They show that the conditional equity premium is a linear function of conditional consumption and market return volatilities, which can be estimated handily by various Generalized Autoregressive Conditonal Heterskedasticity (GARCH) and Stochastic Volatility (SV) models. Using the data from India, we find that conditional consumption and market volatilities are capable of explaining cross-sectional return differences. Also, the model prediction is consistent with observed declining equity premium.

Keywords: Financial Economics; Macroeconomics and Monetary Economics; Equity Premium Puzzle (search for similar items in EconPapers)
JEL-codes: G12 G15 G17 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ore
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Journal Article: Capital Asset Pricing Model and Stochastic Volatility: A Case Study of India (2016) Downloads
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