Consumption asset pricing and the term structure

Stuart Hyde, Mohamed Sherif

    Research output: Contribution to journalArticle

    Abstract

    We investigate the relationship between consumption and the term structure using U.K. interest rate data. We demonstrate that the term structure contains information about future economic activity as implied by the benchmark time separable power utility consumption based capital asset pricing model (C-CAPM) since the yield spread has forecasting power for future consumption growth. Further, we analyze the ability of this benchmark and two alternative models which adopt utility functions characterized by non-separability, namely, the extension to the habit formation model of Campbell and Cochrane (1999) proposed by Wachter (2006) and the housing C-CAPM proposed by Piazzesi, Schneider and Tuzel (2007). Our findings are supportive of the habit formation specification of Wachter (2006), other models fail to yield economically plausible parameter values. © 2009.

    Original languageEnglish
    Pages (from-to)99-109
    Number of pages11
    JournalQuarterly Review of Economics and Finance
    Volume50
    Issue number1
    DOIs
    Publication statusPublished - Feb 2010

    Fingerprint

    Capital asset pricing model
    Asset pricing
    Benchmark
    Term structure
    Habit formation
    Utility function
    Economic activity
    Nonseparability
    Alternative models
    Yield spread
    Consumption growth
    Housing consumption
    Power utility
    Interest rates

    Keywords

    • Habit formation
    • Housing consumption
    • Risk aversion
    • Term structure

    Cite this

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    Consumption asset pricing and the term structure. / Hyde, Stuart; Sherif, Mohamed.

    In: Quarterly Review of Economics and Finance, Vol. 50, No. 1, 02.2010, p. 99-109.

    Research output: Contribution to journalArticle

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    AU - Sherif, Mohamed

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    AB - We investigate the relationship between consumption and the term structure using U.K. interest rate data. We demonstrate that the term structure contains information about future economic activity as implied by the benchmark time separable power utility consumption based capital asset pricing model (C-CAPM) since the yield spread has forecasting power for future consumption growth. Further, we analyze the ability of this benchmark and two alternative models which adopt utility functions characterized by non-separability, namely, the extension to the habit formation model of Campbell and Cochrane (1999) proposed by Wachter (2006) and the housing C-CAPM proposed by Piazzesi, Schneider and Tuzel (2007). Our findings are supportive of the habit formation specification of Wachter (2006), other models fail to yield economically plausible parameter values. © 2009.

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    KW - Housing consumption

    KW - Risk aversion

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