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Abstract

Vol. 54, No. 2, pp. 126-136 (2003)

“Consumption in Asset Pricing Model with the Japanese Data -A Test of Conditional CAPM with Consumption-Financial Wealth Ratio-”
Tokuo Iwaisako (The Institute of Economic Research, Hitotsubashi University)

Consumption-based asset pricing models have failed to explain the cross-section of asset returns in Japan as well as in the U.S. In this paper, following Lettau and Ludvigson (2001a, b), we estimate a multi-factor model including the consumption-wealth ratio as a conditioning variable for Japanese data. With the data from April 1984 to March 2000, it is shown that the log consumption-stock price ratio has a significant explanatory power for the cross-section of Tokyo stock exchange. The consumption-stock price ratio is a slow-moving variable. It is more appropriate to consider it as a conditioning variable capturing underlying general market condition rather than considering it as a risk factor that explains short-run stochastic variation of stock market.