Re-exploring the CCAPM: The Case of US Industry Returns with Different Price Deflators

Chikashi Tsuji

doi:10.5539/jms.v6n2p67

Abstract

Extending US samples, this paper re-examines the classic consumption-based capital asset pricing model (CCAPM) by the generalized method of moments (GMM). Our re-exploration using US three industry returns and different price deflators supplies the following evidence. First, 1) regarding the CCAPM using the US consumption for nondurable goods and the deflator of total personal consumption expenditures (PCEs), the discount rate and risk aversion parameters show plausible values; and according to the J-tests, our above first CCAPM is generally supported. Second, 2) as for the CCAPM with the US consumption for nondurable goods and services and the deflator of total PCEs, both discount rate and risk aversion parameters generally exhibit plausible values and our J-tests show that our above second CCAPM is highly supported. Third, 3) as for the CCAPM using the US consumption for nondurable goods and the deflator of the PCEs for nondurable goods, both parameters of the discount rate and risk aversion are highly stable and our J-tests indicate that our above third CCAPM is highly supported. Finally, 4) as regards the CCAPM using the US consumption for nondurable goods and services and the calculated implicit deflator of the PCEs for nondurable goods and services, the parameters of the discount rate generally exhibit plausible values, while the risk aversion parameters are not so stable. However, according to the J-tests, our above fourth CCAPM is also highly supported.

Highlights

For understanding asset pricing mechanisms, employing the approach of generalized method of moments (GMM) (Hansen, 1982; Hansen and Singleton, 1982) is effective because by this, we are able to focus on the pricing kernels of asset pricing models
Regarding the consumption-based capital asset pricing model (CCAPM) with PCEs for nondurable goods and services, Table 2 shows that 1) the discount rate parameters are always estimated as the values that are slightly below one except for the one case in Panel B and the one case in Panel D
All the above estimated CCAPMs with PCEs for nondurable goods and services by using the deflator of the US total PCEs are always supported by the J-tests except for the only one case in Panel A of Table 2

Summary

Introduction

For understanding asset pricing mechanisms, employing the approach of generalized method of moments (GMM) (Hansen, 1982; Hansen and Singleton, 1982) is effective because by this, we are able to focus on the pricing kernels of asset pricing models (see, e.g., Epstein and Zin, 1991; Campbell and Cochrane, 1999). From the above two viewpoints, it is valuable to re-explore the classical CCAPM by applying the GMM estimation method Based on this motivation, in this paper, we re-test the traditional CCAPM by expanding US samples and employing Hansen and Singleton’s (1982) GMM. 1) as regards the CCAPM using the US consumption for nondurable goods and the deflator of total personal consumption expenditures (PCEs), the discount rate and risk aversion parameters exhibit plausible values; and according to the J-tests, our above first CCAPM is generally supported. 2) as to the CCAPM with the US consumption for nondurable goods and services and the deflator of total PCEs, both discount rate and risk aversion parameters generally show plausible values and our J-tests indicate that our above second CCAPM is highly supported.

Methods

Results

Conclusion