Consumption CAPM and Cross Section of Expected Returns

Master Thesis by Qi Sun
December 18, 2003

Abstract:

Sharp incapability inherited in a class of Consumption CAPM models in explaining cross-section of returns on size and book to market ratio sorted portfolios was present and has been overcame by two consumption model. With conditioning information provided by consumption wealth ratio or non-housing consumption ratio, these models perform well with US data. This paper tries to verify its applicability to UK data. A similarly sorted data and an industry sorted data helps to find out, the conditioning information of non-housing consumption ratio is very rich and the empirical work within two markets is comparable. However, finite sample distribution of Fama-MacBeth procedure should be considered in further analysis.