Elasticity Of Intertemporal Substitution, Habit Formation And The CCAPM Theory

Asset pricing is a key issue in the fields of economics and finance. In the recent fifty years, many economists have been focused on the theoretical and empirical analysis of it. And they have gained a great number of achievements and developed some important theories, models and methods. Meanwhile, they have also always been troubled by newly problems constantly arisen and applied modern ideas to propose new ways to replace the outdated to solve these problems. And the theories and methods of asset pricing have been constantly developed in this process.Consumption-based asset pricing model (CCAPM) has been one of the main accomplishments in the field of financial economics in the past thirty years. The point that CCAPM and CAPM have something in common lies in the fact that they both demonstrate the changes in asset gains with a simple linear economic variable between asset returns, which leads a leap in the explanation of the relationship between finance and macroeconomic. Before the birth of CCAPM, there had been a lot of empirical studies showing some connection between financial market and macroeconomic. For example, the way the expected returns of various financial assets change to the time has close relationship with some changes in macroeconomic variables, and some variables forecasting the macro-economic time could somewhat predict a variety of financial asset prices, and so on. But no persuasive theory could explain this connection. However, the promising CCAPM couldn't perform well empirically for quite a long time, and there appears some mystery not fully resolved till now, such as equity premium puzzle and risk-free rate puzzle. Nevertheless, its theory is still the focus of the economists. Thus, financial economists have developed it from the utility function form, econometric model specification, estimation, market completeness, various heterogeneity and other aspects, and they have achieved some improvements. Utility function is no longer time-separable but the one with non-separable time, commodity and natural state widely used. Consumption function plays a vital role in empirical performance of CCAPM. And the research shows that time aggregation would appear in the sequence of consumption variables and whether the problem could be solved would determine whether the desired performance of the model could be achieved. The estimation methods, GMM estimation as the representative, play an increasingly important role in the empirical study of asset pricing, but the weak instruments often make the evaluation unsatisfactory. Therefore, the improvement of the methods for estimating is an important topic in the economics. Estimating the parameters of asset pricing model based on consumption, the traditional approach is to consider non-durables and services consuming data, while some economists find that durables-consuming also have a great influence on the parameters of the estimated economics. In explaining the various mysteries, the economists have found that the friction of the market and the various heterogeneity, even some rare catastrophic events, play an important role in the changes of the asset price and the financial market.The financial market of China is established a bit late which is far from perfect, and the asset pricing model based on the background of the developed market has a limited applicability to China. Therefore, the empirical results of China's data are not ideal, which is not beyond our expectation. But the method of analyzing the issues referring to the foreign theories and methods is of great theoretical and practical significance. And this paper also focuses on this point.This paper is made up of five chapters. Chapter One outlines the development on the consumption-based asset pricing model, especially on the state of progress in recent decade. We not only focus on elaborate theoretical improvement, but also introduce the development in the fields of application, and meanwhile we are also concern about the new results obtained by means of empirical analysis.Chapter Two is on equity risk premium puzzle. Because holding the stock has greater risk than holding bonds which so-called risk-free asset, the stock returns should be higher than the bond. However, the long-term historical data of many countries show that the premium is too high and can not be explained by standard CCAPM, which has made equity risk premium puzzle. There are two main elements of this chapter:One is to introduce all kinds of explanatory study of the mystery and the other is to explore the mysteries of resource allocation and social welfare significance according to the reality in our country.Chapter Three describes four typical consumption-based Capital Asset Pricing Model, they are:(1) Constantinides and Duffie (1996) built up the idiosyncratic income shock model; (2) Campbell and Cochrane (1999) put forward the external habit model; (3) Lettau and Ludvigson (2001) put forward the Conditional CCAPM; (4) Bansal and Yaron (2004) put forward the long-term consumption risk model. The four models have a significant impact on studying CCAPM.Chapter Four and Chapter Five mainly reflect my independent job. The main content of Chapter Four is to use the latest research results from abroad, to use various frequencies (monthly, quarterly and annually) of the economic and financial data to estimate the consumption of our residents Elasticity of Intertemporal Substitution (EIS) parameters, and to discuss the realistic significance. In the paper, I respectively consider the estimated heteroscedastic problems of the EIS by data of urban and rural residents, as well as the overall national data and data of some provinces. For our vast areas and urban-rural dual structure of the country, the heterogeneity generally exists, and has important theoretical and policy implications.Chapter Five mainly deals with the consumer behavior of urban and rural residents, finding that China's consumption does not follow random walk, with a certain percentage of the rule of thumb consumers sensitive to the changes of income. The relevant research of Chapter Four also shows that Chinese residents have strong motivation for precautionary savings. The empirical analyses carried out under the habit formation model show that the residents in some areas of our country have the characteristic of habitual consumption, which has some influence on the monetary policy.