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  • Consumption-based CAPM models: International evidence

    Author(s)
    Darrat, Ali F
    Li, Bin
    Park, Jung Chul
    Griffith University Author(s)
    Li, Bin
    Year published
    2011
    Metadata
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    Abstract
    We examine the performance of several types of the consumption-based CAPM (C-CAPM) models to explore if consumption factors matter for determining excess returns across 17 MSCI country indexes. While the classic world C-CAPM does exhibit some power in explaining cross-sectional variations of expected excess returns, the model seems to require an implausibly large coefficient of risk aversion. The more sophisticated models including the heterogeneous C-CAPM, the world surplus consumption and the habit-formation models provide more reasonable estimates and add substantial explanatory power for the variation in the cross section ...
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    We examine the performance of several types of the consumption-based CAPM (C-CAPM) models to explore if consumption factors matter for determining excess returns across 17 MSCI country indexes. While the classic world C-CAPM does exhibit some power in explaining cross-sectional variations of expected excess returns, the model seems to require an implausibly large coefficient of risk aversion. The more sophisticated models including the heterogeneous C-CAPM, the world surplus consumption and the habit-formation models provide more reasonable estimates and add substantial explanatory power for the variation in the cross section of excess stock returns. Our results suggest that country-specific consumption risk is not fully diversified thus implying that stock returns are related to idiosyncratic consumption risk.
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    Journal Title
    Journal of Banking &Finance
    Volume
    35
    Issue
    8
    DOI
    https://doi.org/10.1016/j.jbankfin.2011.01.008
    Subject
    Applied mathematics
    Economic theory
    Banking, finance and investment
    Finance
    Publication URI
    http://hdl.handle.net/10072/40866
    Collection
    • Journal articles

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