Comparing Consumption-based Asset Pricing Models: The Case of an Asian City

Kwan, Yum K. and Leung, Charles Ka Yui and Dong, Jinyue (2014): Comparing Consumption-based Asset Pricing Models: The Case of an Asian City.

Abstract

Eight consumption-based asset pricing models are developed, estimated and compared their capacities in accounting for the asset markets in Hong Kong. Results based on conventional metrics or recently developed econometric techniques deliver similar results: introducing housing into the consumption-based models does not always improve the models’ performance; how it is introduced matters. Recursive utility model and its housing-augmented variant, which emphasize the importance of early resolution of uncertainty and long term risk, outperform alternative models in forecasting stock returns. Collateral constraint model outperforms in predicting housing return, suggesting the importance of imperfect capital market in the housing market.

• Item Type: MPRA Paper
• Language: English
• Keywords: Consumption-based asset pricing model; Recursive utility; Habit formation; Consumption growth risk; Composition risk; Labor income risk; Long-run risk; Collateral constraint; Hansen-Jagannathan distance; Model confidence sets.
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E20 - General; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R3 - Real Estate Markets, Spatial Production Analysis, and Firm Location > R30 - General

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