Aggregate Consumption-Wealth Ratio and the Cross-Section of Stock Returns: Some International Evidence

Paul Gao and Kevin Huang ()
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Paul Gao: Department of Finance University of Notre Dame Notre Dame

Annals of Economics and Finance, 2008, vol. 9, issue 1, 1-37

Abstract: We find that the short-term deviations from long-run consumption-wealth relationship (cay) forecast stock market returns and serve as a conditioning variable in the capital asset pricing model (CAPM) for explaining the cross-section of stock returns for the United Kingdom and Japan. Our cross-sectional regressions using cay as a conditioning variable as opposed to using an alternative variable, tay, constructed using calendar time in place of consumption indicate that it is unlikely to be a spurious variable and provides useful information concerning the economic fundamentals. We show that both a consumption-based capital asset pricing model (CCAPM) and a human-capital-augmented capital asset pricing model (HC-CAPM) in conjunction with this conditioning variable can explain much of the cross-section of stock returns in each of the two countries; yet, in terms of relative performance, our results tend to favor the conditional HC-CAPM over the conditional CCAPM for pricing U.K. and Japanese cross-sectional returns.

Keywords: Consumption-Wealth Ratio; CAPM; CCAPM; HC-CAPM; Factor Model (search for similar items in EconPapers)
JEL-codes: E21 E44 G10 G14 (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (10)

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Related works:
Working Paper: Aggregate consumption-wealth ratio and the cross-section of stock returns: some international evidence (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:cuf:journl:y:2008:v:9:i:1:p:1-37

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