Consumption-based CAPM models: International evidence

Ali F. Darrat, Bin Li and Jung Chul Park

Journal of Banking & Finance, 2011, vol. 35, issue 8, 2148-2157

Abstract: 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.

Keywords: C-CAPM; Consumption; model; International; financial; markets; Heterogeneous; consumption; model; Habit-formation; model (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:8:p:2148-2157

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