Consumption and stock returns in Australia: A revisit

Abstract

This paper studies the empirical performance of a linearised version of the classic CCAPM in the Australian market. The studies of Faff and Oliver (1998) and Faff (1998) are extended by employing more recent data and utilising 25 size/BM portfolios as well as industry portfolios. By comparison, the CAPM and the Fama-French three-factor model are also considered. There is evidence that the market factor, the size and value factors can explain the time-series but not the cross-sectional variation in portfolio returns. By contrast, though the CCAPM is inferior to the CAPM and the Fama-French three-factor model in the time-series regressions, the restricted estimation results show that there exists a statistically positive estimate of the market price of consumption risk, which implies that an asset's expected return rises with its consumption risk. Using the lagged portfolio returns, the CCAPM is generally not rejected for both the industry portfolios and the 25 size/BM portfolios. This supports a linear equality between reward and risk implied by the CCAPM.