Household Consumption Smoothing Through Equity Investment in the United States and Japan: An Empirical Examination of the Consumption-Capital Asset Pricing Model (C-CAPM)

Abstract

The C-CAPM is examined based on a constant relative risk aversion utility function. The subjective discount rate (beta) and coefficient of risk aversion (gamma) are estimated by recursive generalized method of moments estimation over the 1987:12-2010:7 period for the US and Japan. In contrast with previous empirical research, the findings show that the C-CAPM fits well for both countries yet for different time periods (2000-2010 for the US and for the full sample period for Japan). However, the gamma coefficient estimated for the US was high (10.8) compared with that for Japan (0.3). I also find that there is a strong relationship between US stock market returns and Japanese household consumption in the 1992-1999 period, despite only about 10% of Japanese households holding equities in that period. Parameter stability tests are also performed for the model estimated using the full sample and breakpoints were found in the models.