Real Economy Effects on Consumption-Based CAPM

Dandan Zheng,Huan Jin,Shusheng Ding,Tianxiang Cui

doi:10.3390/math10030360

Dandan Zheng, Huan Jin + Show 2 more

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https://doi.org/10.3390/math10030360

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Abstract

The consumption-based capital asset pricing model (CCAPM) is an attractive research field in finance, and extant studies have examined the impacts of different factors towards traditional CCAPM, intending to improve the model from the practical perspective. In this paper, we comprehensively scrutinize the real economy effects on the CCAPM by comprising expenditure on durable, expenditure on non-durable goods, services, and real estate four factors. Our study pays great attention to the real economy effect on the CCAPM based on two types of portfolios. By employing both time-series and cross-sectional analysis, our empirical results suggest that the real economy factors can help traditional CCAPM to produce better asset pricing results. Particularly, incorporating the real estate component into the CCAPM model can improve its explanation power on the stock market risk. Our results are potentially useful for investors, portfolios managers and policy makers towards the CCAPM.

Highlights

There is a consensus in asset pricing literature that risky assets and portfolios shall bring higher return for investors who are risk averse
It thereby strengthens the argument that the consumption would be frustrated by the real estate investment. We demonstrate that this consumption obstruction would have a considerable effect on the capital asset pricing, and we can quantify such effect via our consumption-based Capital Asset Pricing Model (CAPM) (CCAPM) model
The main aim is to obtain the maximum utility for whole time, we introduce the Intertemporal Capital Asset Pricing Model (ICAPM) at first, which was released by Merton in 1969

Summary

Introduction

There is a consensus in asset pricing literature that risky assets and portfolios shall bring higher return for investors who are risk averse. Since Sharpe (1964) [1] and Lintner (1965) [2] introduced the Capital Asset Pricing Model (CAPM), plenty of constraint conditions and assumptions for the model have been demonstrated. Beta is a measurement of systematic risk for a specified asset or the portfolio, known as market beta in CAPM. In CCAPM, the definition of consumption beta is the covariance of stock’s return and per capita consumption [8]. This consumption beta is restructuring the meaning of systematic risk, but it provides practical insights for economists to undertake empirical studies in reality [9]

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