Stock Returns and Consumption Factors in the Australian Market: Cross-Sectional Tests

Posted: 5 Feb 2012

See all articles by Li Bin

Li Bin

affiliation not provided to SSRN

Benjamin Liu

Monash University - Department of Accounting and Finance

Eduardo Roca

Griffith University

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

Suggested Citation

Bin, Li and Liu, Benjamin and Roca, Eduardo, Stock Returns and Consumption Factors in the Australian Market: Cross-Sectional Tests (August 25, 2011). Australian Journal of Management, Vol. 36, No. 2, 2011, Available at SSRN: https://ssrn.com/abstract=1998692

Li Bin (Contact Author)

affiliation not provided to SSRN ( email )

Benjamin Liu

Monash University - Department of Accounting and Finance ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia
+61 3 9905 5415 (Phone)
+61 3 9905 5475 (Fax)

Eduardo Roca

Griffith University ( email )

170 Kessels Road, Nathan
Queensland
Brisbane, 4111
Australia
(07) 373 57583 (Phone)

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