Consumption-based capital asset pricing models : empirical evidence from the Austrian capital market

Abstract

Using Austrian data, two consumption-based capital asset pricing models were empirically tested and estimated in this study, namely the simple power utility model first introduced by Mehra and Prescott and Abel's more general "Catching up with the Joneses". First of all, the performance of these models using historical averages and reasonable values of the relative risk aversion coefficient was examined. In addition, the model parameters were formally estimated using the generalized method of moments approach as suggested by Hansen and the overall fit of the models was tested by Hansen's J test. Additionally, this empirical study examines whether the used time series satisfy the necessary model assumptions like a lognormal distribution of returns on a risky asset and consumption growth. In order to be able to adopt the generalized method of moments the underlying stationarity assumptions of the time series was tested.