Evaluating the consumption-capital asset pricing model using Hansen-Jagannathan bounds: evidence from the UK

Abstract

The consumption based capital asset pricing model is evaluated using Hansen and Jagannathan (1991) bounds and 68 years of annual UK data. In contrast to the standard statistical methodology, the Hansen–Jagannathan methodology is fully non‐parametric and based on only one principle from economic theory, namely the Law of One Price. From this principle feasible regions for mean–standard deviation pairs of stochastic discount factors can be derived using asset returns data. The empirical results show that if agents are very risk‐averse, a simple time‐separable power utility version of the C‐CAPM does generate a stochastic discount factor with mean and standard deviation inside the feasible region. The UK data also display the equity premium and risk‐free rate puzzles, although to a lesser extent than has been documented for the USA. © 1998 John Wiley & Sons, Ltd.

The ex ante real rate and inflation premium under a habit consumption model

“…6 The equity premium and the risk-free rate puzzles were first presented in Mehra and Prescott (1985) and Weil (1989), respectively. Discussions on how consumption models deal with these puzzles are found in Campbell (2000), Cochrane and Hansen (1992), Hansen and Jagannathan (1991), and Hansen and Singleton (1982) regarding the US market, and Allais, Cadiou, and Des (1991), Engsted (1998), and Hyde and Sherif (2005) regarding the UK market. 7 They do not examine internal habit models such as the ones from Constantinides (1990) and Ferson and Constantinides (1991).…”

Resuscitating the C-CAPM: empirical evidence from France and Germany

“…Given the equity premium for France of 2.28%, the standard deviation of the excess return is 20.3% resulting in a Sharpe Ratio of 11.3%, for Germany the corresponding figures are 1.79 and 17.7%, giving a Sharpe Ratio of 10.1%. These Sharpe Ratios are of much smaller magnitude than the ratio reported by Engsted (1998) for the UK, 39.5%.…”

The Comovement of US and UK Stock Markets

“…The data to be used in this paper are basically identical to the data used in numerous prior studies, e.g. Bulkley and Tonks (1989), Shiller (1989), Shiller and Beltratti (1992), Beltratti and Shiller (1993), Lund and Engsted (1996), Engsted and Lund (1997), Cuthbertson et al (1997Cuthbertson et al ( , 1998, and Engsted (1998), but updated to 1999. For the USA, the Standard and Poor Composite Stock Price Index and associated dividends are used to construct stock returns.…”