Do Consumption-Based Asset Pricing Models Explain Own-History Predictability in Stock Market Returns?

45 Pages Posted: 18 May 2018 Last revised: 23 Oct 2022

See all articles by Michael Ashby

Michael Ashby

Faculty of Economics, University of Cambridge; Downing College, Cambridge

Oliver B. Linton

University of Cambridge

Date Written: October 20, 2022

Abstract

We show that three prominent consumption-based asset pricing models - the Bansal-Yaron, Campbell-Cochrane and Cecchetti-Lam-Mark models - cannot explain the own-history predictability properties of stock market returns. We show this by estimating these models with GMM, deriving ex-ante expected returns from them and then testing whether the difference between realised and expected returns is a martingale difference sequence, which it is not. Furthermore, semi-parametric tests of whether the models' state variables are consistent with the degree of own-history predictability in stock returns suggest that only the Campbell-Cochrane habit variable may be able to explain return predictability, although the evidence on this is mixed.

Keywords: Consumption-Based Asset Pricing Models, Serial Correlation, Predictability, Martingale Difference Sequence, Variance Ratio, Quantilogram, Rescaled Range, Mean Reversion

JEL Classification: C52, C58, G12

Suggested Citation

Ashby, Michael and Linton, Oliver B., Do Consumption-Based Asset Pricing Models Explain Own-History Predictability in Stock Market Returns? (October 20, 2022). Available at SSRN: https://ssrn.com/abstract=3173586 or http://dx.doi.org/10.2139/ssrn.3173586

Michael Ashby (Contact Author)

Faculty of Economics, University of Cambridge ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Downing College, Cambridge ( email )

Regent St
Cambridge, CB2 1DQ
United Kingdom

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

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