Empirical Studies Of Consumption-based Asset Pricing Models

The classic consumption-based asset pricing theory has a solid economic foundation and can fully describe the characteristics of assets like stocks and bonds,but it encounters great difficulties in empirical research in western countries such as “the equity premium puzzle” and “size” “value” premium puzzle etc.This article focuses on the existence of the so-called "equity premium puzzle" in China,using several wellknown consumption-based asset pricing models to conduct empirical research on the Chinese capital market,and using a simple dynamic stochastic general equilibrium model to analysis Chinese market.This article adopts the log-normal pricing method.By using an approximate asset pricing model,it’s easy to discuss the existence of the "equity premium puzzle" in China.The results show that,without considering the correlation between consumption growth and asset returns,the risk aversion coefficient using arithmetic average method in China is about 5.3-5.8,and the western countries 10-25;while considering the correlation between consumption growth and asset returns,the risk aversion coefficient using arithmetic average method in China is about 22-24,and the western countries 100-450.Comparing the data between China and western countries,the risk aversion coefficient in China seems not too high,which probably means that there may be no equity premium puzzle in China.This paper uses generalized method of moments to conduct empirical research on the consumption-based asset pricing models.The estimators are almost significant at the 5% or even 1% significance level and in line with economic expectations and previous literatures.These models can pass the over-identification test,which probably means that the consumption-based asset pricing model is applicable to the Chinese financial market,but there may be no habit effect in the data.In addition,this article believes that the theoretical basis for the application of consumption-based asset pricing models in China derives from the nature of the economic cycle represented by consumption data.As a proxy variable for the economic cycle,consumption data has the pricing power for assets.This paper constructs a simple dynamic stochastic general equilibrium model,which is featured by a quadratic adjustment cost.This paper calculates stylized fact of Chinese business cycle and simulates the economic fluctuations under the technology shock for 2000 periods.The simulated datas are similar to the real data.However,the model fails to produce a realistic equity premium,which needs to be studied on a more complete model.This paper uses the impulse response function to simulate and analyze the economy when the system is impacted by a unit technology shock.The results show that the existence of adjustment costs makes Tobin Q no longer equal to 1,but changes with investment;when adjustment costs increase,real economic variables such as output,investment,and investment income will decrease accordingly,but consumption in the short-term will rise due to declination of investment.The results also show that the risk aversion coefficient has an inhibitory effect on economic variables like output,labor,and consumption in particular;the higher the risk aversion coefficient is,the smoother the consumption processes are,and the additional resources generated by the positive technology shock will be put into investment,which incurs a high adjustment cost.Therefore,the higher the risk aversion coefficient,the higher the adjustment cost and the stronger the inhibitory effect;however,an interesting phenomenon is that due to the existence of adjustment costs.On the contrary,the value of the risk aversion coefficient has little effect on the quantity of investment,which reflects the reason of investment is " Going beyond the limit is as bad as falling short" due to the existence of adjustment cost.Furthermore,with the investment unchanged,Tobin Q and the capital stock will hardly be affected.China is a developing country.The economic,political,and social systems are quite different from Western countries.With this in mind,this article uses a series of basic pricing models to conduct empirical research on the Chinese market.The results show that these models are almost applicable to China.However,to explain some contradicting conclusions with the West in China,it is still necessary to develop a financial model that conforms to Chinese financial practice based on the assumptions of Chinese financial facts.