Asset Pricing With and Without Garbage: The Overlooked Triple-Hypothesis Problem

54 Pages Posted: 10 Jul 2019 Last revised: 9 May 2022

See all articles by Stefanos Delikouras

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Date Written: May 9, 2022

Abstract

Testing consumption-based asset pricing models is a triple hypothesis, which requires selecting the consumption data and examining the assumptions for investor preferences and consumption dynamics. We formalize the triple-hypothesis problem within a GMM framework that relaxes the CRRA assumption, jointly estimates consumption dynamics with Euler equations, and includes the risk-free rate variance as a target moment. We find that consumption measures proposed as alternatives to the BEA consumption (e.g., garbage) do not address the shortcomings of the canonical CRRA model with i.i.d. consumption growth. Instead, a model with BEA consumption, Epstein-Zin preferences, and non-i.i.d. consumption dynamics performs equally well.

Keywords: Cross-section of expected returns, Epstein-Zin preferences, risk-free rate, GMM, consumption growth

JEL Classification: D51, D91, E21, G12

Suggested Citation

Delikouras, Stefanos and Korniotis, George M., Asset Pricing With and Without Garbage: The Overlooked Triple-Hypothesis Problem (May 9, 2022). University of Miami Business School Research Paper No. 3417217, Available at SSRN: https://ssrn.com/abstract=3417217 or http://dx.doi.org/10.2139/ssrn.3417217

Stefanos Delikouras (Contact Author)

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

George M. Korniotis

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

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