Testing world consumption asset pricing models

Abstract

Using data for 17 countries, this study empirically examine the performance of four consumption-based capital asset pricing models (CCAPM): the classic world CCAPM under the assumption of complete international markets integration, the heterogeneous world CCAPM under the framework of Constantinides and Duffie (1996) and two world habit models. The nonlinear models are estimated and tested by Hansen's (1982) GMM. The empirical results suggest that a large and economically implausible coefficient of relative risk aversion is needed to resolve the equity premium puzzle for the classic world CCAPM; by contrast, more sophisticated consumption models (the heterogeneous world CCAPM and the world surplus CCAPM) are able to generate an equity premium at lower coefficients of relative risk aversion. The study provides another piece of evidence supporting consumption-based models, particularly the heterogeneous world CCAPM and the world surplus CCAPM, for asset pricing in international markets.