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Evaluating the Consumption-Capital Asset Pricing Model Using Hansen-Jagannathan Bounds: Evidence from the UK

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  • Engsted, Tom

Abstract

The consumption based capital asset pricing model is evaluated using Hansen and Jagannathan (1991) 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. Copyright @ 1998 by John Wiley & Sons, Ltd. All rights reserved.

Suggested Citation

  • Engsted, Tom, 1998. "Evaluating the Consumption-Capital Asset Pricing Model Using Hansen-Jagannathan Bounds: Evidence from the UK," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 3(4), pages 291-302, October.
    • Handle: RePEc:ijf:ijfiec:v:3:y:1998:i:4:p:291-302
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    1. repec:bla:jecsur:v:16:y:2002:i:3:p:301-55 is not listed on IDEAS
    2. Madureira, Leonardo, 2007. "The ex ante real rate and inflation premium under a habit consumption model," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 355-382, June.
    3. Stuart Hyde & Mohamed Sherif, 2004. "Don't break the habit: structural stability tests of consumption models in the UK," Money Macro and Finance (MMF) Research Group Conference 2003 49, Money Macro and Finance Research Group.
    4. Stuart Hyde & Keith Cuthbertson & Dirk Nitzsche, 2005. "Resuscitating the C-CAPM: empirical evidence from France and Germany," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(4), pages 337-357.
    5. Nader Shahzad Virk, 2013. "Evidence for state and time nonseparable preferences: the case of Finland," Applied Financial Economics, Taylor & Francis Journals, vol. 23(24), pages 1821-1838, December.
    6. Michelle L. Barnes & Anthony W. Hughes, 2002. "A quantile regression analysis of the cross section of stock market returns," Working Papers 02-2, Federal Reserve Bank of Boston.
    7. Benjamin Auer, 2011. "Can consumption-based asset pricing models explain the cross-section of investment funds returns?," Applied Financial Economics, Taylor & Francis Journals, vol. 21(17), pages 1273-1279.

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