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Empirical Tests of Consumption based Asset Pricing Models: UK Data (2011)

Ref: econ0015

This dissertation analyses the underlying and fundamental performance of consumption based asset pricing models using quarterly UK stock market and money market data. In particular I compare the empirical fit of the standard time separable expected utility model with constant relative risk aversion as developed by Lucas, also known as the power utility specification with respect to the general class of consumption based asset pricing models, relative to: the recursive utility model as in Epstein and Zin that abandons the expected utility assumption, a time non-separable model that incorporates habit persistence as developed by Abel also known as “catching up with the Joneses”  model that exhibits external habit formation. I also present two more models in the class of habit persistence that I was unable to test due to technical limitations, the internal habit formation model by Ferson and Constantinides and an alternative External habit formation model as specified by Campbell and Cochrane. I include literature on these two models as they have historically performed better than the models I examine, providing an insight into the different, more “accommodating”,  specifications of Consumption based asset pricing models which have usually failed in practical applications and been criticized for their rigid specifications to explain highly volatile equity returns with the relatively low volatile consumption trends. Empirical estimation and testing methods include the generalized methods of moments following a similar methodology as described in Hansen and Singleton's, but all estimations are conducting in Eviews, which has some limitations hence the empirical methods are not exactly as conducted in Hansen and Singleton.

  • 14,000 words – 40 pages in length
  • Excellent use of literature
  • Good in depth analysis
  • Outstanding use of economic and finance models 
  • Ideal for business and economics students


Introduction

The Models
CRRA Power Utility
Epstein and Zin's Recursive Utility
Abel's Catching Up With the Joneses
Campbell & Cochrane's Habit Persistence
Ferson & Constantinides' Habit Persistence

Data & Econometric Methods
Consumption Data
Equity Data
Money Market Data
GMM Framework
Weighting Matrix
Estimation Procedure

Empirical Results & Analysis
Seasonally Adjusted Data
Non-Seasonally Adjusted Data

Conclusions
Limitations

References



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