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Do consumption-based asset pricing models explain own-history predictability in stock market returns?

Michael Ashby and Oliver B. Linton

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: We show that three prominent consumption-based asset pricing models - the Bansal-Yaron, Campbell-Cochrane and Cecchetti-Lam-Mark models - cannot explain the own-history predictability properties of stock market returns. We show this by estimating these models with GMM, deriving ex-ante expected returns from them and then testing whether the difference between realised and expected returns is a martingale difference sequence, which it is not. Furthermore, semi-parametric tests of whether the models' state variables are consistent with the degree of own-history predictability in stock returns suggest that only the Campbell-Cochrane habit variable may be able to explain return predictability, although the evidence on this is mixed.

Keywords: consumption-based asset pricing models; martingale difference sequence; MIDAS; power spectrum; predictability; quantilogram; rescaled range; serial correlation; variance ratio (search for similar items in EconPapers)
JEL-codes: C52 C58 G12 (search for similar items in EconPapers)
Date: 2022-10-20
New Economics Papers: this item is included in nep-fmk
Note: obl20, mwa22
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