2010-11: An Empirical Investigation of Consumption CAPMs in the Australian Market (Working paper)

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Li, Bin
Liu, Benjamin
Roca, Eduardo
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Akimov, Alexandr

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2010
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24 pages

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Abstract

We test conditional (C)CAPMs in the Australian equity market. The conditional variables used are Lettau and Ludvigson's (2001a, 2001b) consumption-wealth ratio, Campbell and Cochrane's (1999) surplus consumption ratio and Santos and Veronesi's labor income to consumption ratio (2006). We test the cross-sectional implications of these variables using the Fama-French 25 size and book-to-market portfolios and the Australian industry portfolios. The Fama-MacBeth (1973) cross-sectional regressions on the 25 size/BM portfolios show that the conditional model using some scaling variable can perform better than the unconditional models. However, these conditional models cannot outperform the Fama-French three-factor model. The conditional CCAPM with the labour income to consumption ratio as the scaling factor can match more closely to the Fama- French three-factor model. We also find consumption growth is non-contemporaneously related to portfolio returns as the consumption risk premium is positive and statistically significant using consumption growth two-quarter ahead. The asset pricing models perform poorly for the 19 industry portfolios.

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Copyright © 2010 by author(s). No part of this paper may be reproduced in any form, or stored in a retrieval system, without prior permission of the author(s).

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Finance

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G12 - Asset Pricing; Trading volume; Bond Interest Rates

Consumption-Based CAPM

Consumption-Wealth Ratio

Surplus Consumption

Labour Income

Conditional Model

Asset Pricing

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