IDEAS home Printed from https://ideas.repec.org/a/taf/apfiec/v16y2006i14p1019-1027.html
   My bibliography  Save this article

Do consumption-based asset pricing models explain return predictability?

Author

Listed:
  • Wessel Marquering

Abstract

This paper studies whether time series predictability is consistent with risk-based asset pricing models. Whereas earlier papers - e.g. Kirby (1998), Cecchetti, et al. (2000) and Avramov (2004) - show that returns are too predictable to be explained by rational asset pricing, we find that the predictability typically found in linear forecasting models is not necessarily larger than can be expected from rational asset pricing. More specifically, when preferences are summarized by habit persistence with habit and risk aversion parameters equal to 0.97 and 4.8 (or greater) respectively, a degree of predictability is obtained that is compatible with the predictability found in the recent literature.

Suggested Citation

  • Wessel Marquering, 2006. "Do consumption-based asset pricing models explain return predictability?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(14), pages 1019-1027.
    • Handle: RePEc:taf:apfiec:v:16:y:2006:i:14:p:1019-1027
    DOI: 10.1080/09603100500426416
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/09603100500426416
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/09603100500426416?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Marquering, Wessel & Verbeek, Marno, 2004. "The Economic Value of Predicting Stock Index Returns and Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 39(2), pages 407-429, June.
    2. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    3. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    4. Doron Avramov, 2004. "Stock Return Predictability and Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 17(3), pages 699-738.
    5. Hansen, Lars Peter & Richard, Scott F, 1987. "The Role of Conditioning Information in Deducing Testable," Econometrica, Econometric Society, vol. 55(3), pages 587-613, May.
    6. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    7. Samih Antoine Azar, 2002. "Predictability of stock returns: is it rational?," Applied Financial Economics, Taylor & Francis Journals, vol. 12(8), pages 575-580.
    8. Pesaran, M Hashem & Timmermann, Allan, 1995. "Predictability of Stock Returns: Robustness and Economic Significance," Journal of Finance, American Finance Association, vol. 50(4), pages 1201-1228, September.
    9. Clark, Andrew E., 1999. "Are wages habit-forming? evidence from micro data," Journal of Economic Behavior & Organization, Elsevier, vol. 39(2), pages 179-200, June.
    10. Kirby, Chris, 1998. "The Restrictions on Predictability Implied by Rational Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 343-382.
    11. Joelle Miffre, 2002. "The predictability of futures returns: rational variation in required returns or market inefficiency?," Applied Financial Economics, Taylor & Francis Journals, vol. 12(10), pages 715-724.
    12. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    13. Pok-sang Lam & Stephen G. Cecchetti & Nelson C. Mark, 2000. "Asset Pricing with Distorted Beliefs: Are Equity Returns Too Good to Be True?," American Economic Review, American Economic Association, vol. 90(4), pages 787-805, September.
    14. Heaton, John, 1995. "An Empirical Investigation of Asset Pricing with Temporally Dependent Preference Specifications," Econometrica, Econometric Society, vol. 63(3), pages 681-717, May.
    15. Grossman, Sanford J & Shiller, Robert J, 1981. "The Determinants of the Variability of Stock Market Prices," American Economic Review, American Economic Association, vol. 71(2), pages 222-227, May.
    16. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
    17. Marquering, Wessel & Verbeek, Marno, 1999. "An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 243-265, September.
    18. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182, National Bureau of Economic Research, Inc.
    19. Tony Wirjanto, 1997. "Aggregate consumption behaviour with time-nonseparable preferences and liquidity constraints," Applied Financial Economics, Taylor & Francis Journals, vol. 7(1), pages 107-114.
    20. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," The Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-428.
    21. Fama, Eugene F, 1991. "Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-1617, December.
    22. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Committee, Nobel Prize, 2013. "Understanding Asset Prices," Nobel Prize in Economics documents 2013-1, Nobel Prize Committee.
    2. George M. Constantinides, 2006. "Market Organization And The Prices Of Financial Assets," Manchester School, University of Manchester, vol. 74(s1), pages 1-23, September.
    3. Kris Jacobs & Kevin Q. Wang, 2002. "Idiosyncratic Consumption Risk and the Cross-Section of Asset Returns," CIRANO Working Papers 2002s-11, CIRANO.
    4. Liu, Ludan, 2008. "It takes a model to beat a model: Volatility bounds," Journal of Empirical Finance, Elsevier, vol. 15(1), pages 80-110, January.
    5. Marquering, Wessel & Verbeek, Marno, 1999. "An empirical analysis of intertemporal asset pricing models with transaction costs and habit persistence," Journal of Empirical Finance, Elsevier, vol. 6(3), pages 243-265, September.
    6. Rapach, David & Zhou, Guofu, 2013. "Forecasting Stock Returns," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 2, chapter 0, pages 328-383, Elsevier.
    7. George M. Constantinides, 2002. "Rational Asset Prices," Journal of Finance, American Finance Association, vol. 57(4), pages 1567-1591, August.
    8. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    9. John Donaldson & Rajnish Mehra, 2007. "Risk Based Explanations of the Equity Premium," NBER Working Papers 13220, National Bureau of Economic Research, Inc.
    10. Hansen, Lars Peter, 2013. "Uncertainty Outside and Inside Economic Models," Nobel Prize in Economics documents 2013-7, Nobel Prize Committee.
    11. Cochrane, John H., 2005. "Financial Markets and the Real Economy," Foundations and Trends(R) in Finance, now publishers, vol. 1(1), pages 1-101, July.
    12. Kris Jacobs, 2001. "Estimating Nonseparable Preference Specifications for Asset Market Participants," CIRANO Working Papers 2001s-12, CIRANO.
    13. John Y. Campbell, 2000. "Asset Pricing at the Millennium," Journal of Finance, American Finance Association, vol. 55(4), pages 1515-1567, August.
    14. Kris Jacobs, 2002. "The Rate of Risk Aversion May Be Lower Than You Think," CIRANO Working Papers 2002s-08, CIRANO.
    15. Raghu Suryanarayanan, 2006. "Implications of Anticipated Regret and Endogenous Beliefs for Equilibrium Asset Prices: A Theoretical Framework," CSEF Working Papers 162, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    16. Ludvigson, Sydney C., 2013. "Advances in Consumption-Based Asset Pricing: Empirical Tests," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 799-906, Elsevier.
    17. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182, National Bureau of Economic Research, Inc.
    18. Campbell, John Y., 2003. "Consumption-based asset pricing," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 13, pages 803-887, Elsevier.
    19. Kirby, Chris, 1998. "The Restrictions on Predictability Implied by Rational Asset Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 11(2), pages 343-382.
    20. Chrétien, Stéphane, 2012. "Bounds on the autocorrelation of admissible stochastic discount factors," Journal of Banking & Finance, Elsevier, vol. 36(7), pages 1943-1962.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:apfiec:v:16:y:2006:i:14:p:1019-1027. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAFE20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.