Predictability of stock returns and consumption-based CAPM: Evidence from a small open market
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Author(s)
Li, Bin
Zhong, Maosen
Griffith University Author(s)
Year published
2010
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In this study, we use the conditional consumption CAPM (CCAPM) with the consumption-wealth ratio and/or the surplus consumption ratio to examine the predictability of returns in the Australian equity market. We also explore the relationship between expected excess market returns in Australia and the time-varying risk aversion associated with the world as well as local consumption. Our study reveals that the consumption-wealth ratio can predict the variation of excess stock market returns at the intermediate horizons (from 1 year to 2 years); on the other hand, the surplus consumption ratio can only predict excess stock ...
View more >In this study, we use the conditional consumption CAPM (CCAPM) with the consumption-wealth ratio and/or the surplus consumption ratio to examine the predictability of returns in the Australian equity market. We also explore the relationship between expected excess market returns in Australia and the time-varying risk aversion associated with the world as well as local consumption. Our study reveals that the consumption-wealth ratio can predict the variation of excess stock market returns at the intermediate horizons (from 1 year to 2 years); on the other hand, the surplus consumption ratio can only predict excess stock market returns at the very short horizon, one quarter ahead. We show that these two state variables are not mutually exclusive, but complementary. As a small but open market, Australian market's expected returns should be affected by global price of consumption risk. Our results show that both the world surplus consumption ratio and the world consumption-wealth ratio have predictive power for excess returns in the Australian equity market over the long horizons.
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View more >In this study, we use the conditional consumption CAPM (CCAPM) with the consumption-wealth ratio and/or the surplus consumption ratio to examine the predictability of returns in the Australian equity market. We also explore the relationship between expected excess market returns in Australia and the time-varying risk aversion associated with the world as well as local consumption. Our study reveals that the consumption-wealth ratio can predict the variation of excess stock market returns at the intermediate horizons (from 1 year to 2 years); on the other hand, the surplus consumption ratio can only predict excess stock market returns at the very short horizon, one quarter ahead. We show that these two state variables are not mutually exclusive, but complementary. As a small but open market, Australian market's expected returns should be affected by global price of consumption risk. Our results show that both the world surplus consumption ratio and the world consumption-wealth ratio have predictive power for excess returns in the Australian equity market over the long horizons.
View less >
Journal Title
European Journal of Economics, Finance and Administrative Sciences
Volume
2010
Issue
22
Publisher URI
Copyright Statement
© 2010 EuroJournals Publishing, Inc. The attached file is reproduced here in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Subject
Applied economics
Econometrics
Banking, finance and investment
Finance