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  • Predictability of stock returns and consumption-based CAPM: Evidence from a small open market

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    64923_1.pdf (275.8Kb)
    Author(s)
    Li, Bin
    Zhong, Maosen
    Griffith University Author(s)
    Li, Bin
    Year published
    2010
    Metadata
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    Abstract
    In this study, we use the conditional consumption CAPM (CCAPM) with the consumption-wealth ratio and/or the surplus consumption ratio to examine the predictability of returns in the Australian equity market. We also explore the relationship between expected excess market returns in Australia and the time-varying risk aversion associated with the world as well as local consumption. Our study reveals that the consumption-wealth ratio can predict the variation of excess stock market returns at the intermediate horizons (from 1 year to 2 years); on the other hand, the surplus consumption ratio can only predict excess stock ...
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    In this study, we use the conditional consumption CAPM (CCAPM) with the consumption-wealth ratio and/or the surplus consumption ratio to examine the predictability of returns in the Australian equity market. We also explore the relationship between expected excess market returns in Australia and the time-varying risk aversion associated with the world as well as local consumption. Our study reveals that the consumption-wealth ratio can predict the variation of excess stock market returns at the intermediate horizons (from 1 year to 2 years); on the other hand, the surplus consumption ratio can only predict excess stock market returns at the very short horizon, one quarter ahead. We show that these two state variables are not mutually exclusive, but complementary. As a small but open market, Australian market's expected returns should be affected by global price of consumption risk. Our results show that both the world surplus consumption ratio and the world consumption-wealth ratio have predictive power for excess returns in the Australian equity market over the long horizons.
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    Journal Title
    European Journal of Economics, Finance and Administrative Sciences
    Volume
    2010
    Issue
    22
    Publisher URI
    http://www.eurojournals.com/ejefas_22_13.pdf
    Copyright Statement
    © 2010 EuroJournals Publishing, Inc. The attached file is reproduced here in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
    Subject
    Finance
    Applied Economics
    Econometrics
    Banking, Finance and Investment
    Publication URI
    http://hdl.handle.net/10072/34569
    Collection
    • Journal articles

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