Evaluating the consumption-capital asset pricing model using Hansen–Jagannathan bounds: evidence from the UK

✍ Scribed by Tom Engsted

• Publisher: John Wiley and Sons
• Year: 1998
• Tongue: English
• Weight: 219 KB
• Volume: 3
• Category: Article
• ISSN: 1076-9307
• DOI: 10.1002/(sici)1099-1158(199810)3:4<291::aid-ijfe87>3.0.co;2-u

✦ Synopsis

The consumption based capital asset pricing model is evaluated using bounds and 68 years of annual UK data. In contrast to the standard statistical methodology, the Hansen -Jagannathan methodology is fully non-parametric and based on only one principle from economic theory, namely the Law of One Price. From this principle feasible regions for mean -standard deviation pairs of stochastic discount factors can be derived using asset returns data. The empirical results show that if agents are very risk-averse, a simple time-separable power utility version of the C-CAPM does generate a stochastic discount factor with mean and standard deviation inside the feasible region. The UK data also display the equity premium and risk-free rate puzzles, although to a lesser extent than has been documented for the USA.