Testing Consumption-Based CAPM Using the Stochastic Discount Factor

Marcel Stanlei Monteiro and Carlos Enrique Carrasco Gutierrez

Revista Brasileira de Economia - RBE, 2022, vol. 76, issue 1

Abstract: This paper investigates the problem of optimal intertemporal consumption in the CCAPM from a new perspective. We present three estimators for the stochastic discount factor, obtained without the need to make a parametric assumption about preferences, and use them to aggregate the available information about asset returns in the economy. Our dataset covers income, aggregate consumption and return on financial assets, in the last case obtained from the BM&FBovespa database, in the quarterly period from 1996:1 to 2016:4. We also consider the existence of a portion of households subject to credit restriction (rule of thumb consumers), who consume all their current income. The results suggest that the preferences that exhibit the formation of consumption habits combined with the stochastic discount factor originating from the hypotheses of Brownian motion are those that most closely correspond to the hypotheses related to the behavior of aggregate consumption.

Date: 2022
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