Identification Failure in the Intertemporal Consumption CAPM

95-002A

Posted: 13 Jul 1998

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Amlan Roy

Queen Mary, University of London - Department of Economics

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

Date Written: February 1995

Abstract

Using a general equilibrium representative agent framework developed by Lucas (1978), Hansen and Singleton (1983) studied the behaviour of asset returns and consumption growth with maximum likelihood techniques. The model was rejected, but their work is commonly cited for estimates of the underlying parameters governing risk aversion. This paper studies the robustness of the Hansen and Singleton results to alternative specifications of the model and extensions of the data set. We find that estimates of the risk aversion parameter vary widely across data sets and instrument specifications because the Hansen-Singleton model is nearly nonidentified due to the unpredictability of consumption growth. A natural identifying assumption equates "consumption beta" with the coefficient of relative risk aversion, and leads to estimates which are much better behaved.

JEL Classification: C1, C8, E2, G12

Suggested Citation

Neely, Christopher J. and Roy, Amlan and Whiteman, Charles H., Identification Failure in the Intertemporal Consumption CAPM (February 1995 ). 95-002A, Available at SSRN: https://ssrn.com/abstract=7079

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

Amlan Roy (Contact Author)

Queen Mary, University of London - Department of Economics ( email )

Mile End Road
London, E1 4NS
United Kingdom
44 171 975 5085 (Phone)
44 181 983 3580 (Fax)

Charles H. Whiteman

Pennsylvania State University - Smeal College of Business

University Park, PA 16802
United States
814-863-0448 (Phone)

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