Testing the consumption-CAPM in developing equity markets

Abstract

The Consumption Capital Asset Pricing Model (C-CAPM) is tested using data on equity prices in Jordan, Turkey, and Pakistan over the period 1986–1993. The analysis is carried out in two steps. The parameters of agents’ dynamic consumption and investment decisions are first estimated, and then the implied equity market price (based on the model) is compared with the actual evolution of equity prices. The empirical results support the proposition that equity price movements in Jordan, Turkey, and Pakistan are not consistent with the C-CAPM. In each of these developing equity markets, the variability of equity price indices could not be accounted for by information regarding future dividends alone, and the failure to reject the null hypothesis of no cointegration of the implied and actual equity price series is due to parameter instability. © 1997 John Wiley & Sons, Ltd.