Stock Returns and Consumption Factors in the Australian Market: Cross-Sectional Tests
Posted: 5 Feb 2012
Date Written: August 25, 2011
Abstract
We test conditional consumption capital asset pricing models (CCAPMs) in the Australian equity market. The conditional variables used are Lettau and Ludvigson’s (2001a, b) consumption – wealth ratio, Campbell and Cochrane’s (1999) surplus consumption ratio and Santos and Veronesi’s (2006) labor income to consumption ratio. We examine the cross-sectional implications of these variables using the Fama–French 25 size and book-to-market portfolios and Australian industry portfolios. The Fama–MacBeth (1973) cross-sectional regressions on the 25 size/book-to-market portfolios show that the conditional models perform better than the unconditional models. However, these conditional models cannot outperform the Fama–French three-factor model. The conditional CCAPM, with the labor income to consumption ratio as a scaling factor, can match more closely the performance of the Fama–French three-factor model. We also find that consumption growth is non-contemporaneously related to portfolio returns.
Keywords: consumption-based CAPM, consumption-wealth ratio, surplus consumption, labour income, conditional model, asset pricing
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