Asset Pricing With Consuming Habit And Income Constraints

Owing to the paradox of continuity of the classical expected asset return theorylike CAPM, the western countries are increasingly introducing Consumer Choice theoryinto asset pricing theory, and developed a consumption-based capital asset pricingmodel. However, a large number of evidences from developed capital markets showedthat there exists "equity premium puzzle" and "risk-free rate puzzle" in the capitalmarkets. With the rapid development of China’s consumer market and capital market, inrecent years, domestic scholars have gradually started to explore in the area. So, is thereany mystery in China’s capital market? Does the CCAPM apply to China’s capitalmarket? In order to explore the residents of intertemporal consumption introduced intothe pricing of financial assets, the paper focuses on solutions of the standard CCAPM"equity premium puzzle", and made a empirical research based on Abel modelexogenous consumption habits.This paper first reviewed the theoretical limitations of the standard CCAPM andprovided evidence with empirical data from China, U.S., Japan, Britain, Germany,France and Italy. Then on this basis, we studied the academic achievements in exploringthe limitations. We theoretically focused on a comparative analysis of generalizednon-expected utility function Epstein-Zin model, and Abel model and Constantinidesmodel with consumption habit formation, and identified the exogenous consumptionhabit Abel model as the basis of the empirical research. On the basis of the correctedtheory, by using urban residents’ consumption data grouped by the income and theShanghai Composite Index yield, and3-month deposit rates, the paper made anparameter estimation with GMM method, and at last performed the pricing of financialassets simulation using Monte Carlo. Investigated the influences of the grouped urbanresidents exogenous consumption habits on the financial asset pricing.The empirical study found that in GMM estimation, in a given exogenous habitformation factor, the model can make sure a reasonable valuation of constant relativerisk aversion coefficient in either risk-free rate or stock returns to some extent. But in such habit formation level, the coefficient of relative risk aversion did not get areasonable level of unity in the same subjective discount factor. While in the MonteCarlo simulation of stocks and risk-free asset pricing, the paper confirmed the factors inthe model affecting financial asset prices. At the same time, the paper successfully gotlow risk-free return and high risk-premium as the reality, and can effectively explain theseveral puzzles of CCAPM. Thus, this paper considered that Abel model within areasonable range of parameters can be applied to the asset pricing practice of China’sfinancial market. Despite that the income constraint assumptions are not valid supportedby empirical evidence. Based on the theoretical and empirical exploration, the paper atlast proposed inspirations on development of China’s economy and capital market, aswell as ideas of future research on the issue.