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INFLUENCE OF INVESTMENT DECISIONS AND CONSUMPTION ON ASSET PRICING: CCAPM APPROACH
Corresponding Author(s) : Mahboob Ullah
Humanities & Social Sciences Reviews,
Vol. 9 No. 2 (2021): March
Abstract
Purpose of the study: This study examines the influence of investment decisions and consumption on asset pricing from 1980 to 2016.
Methodology: This study has used a quantitative research design and a secondary source is deployed to collect data from 1980 to 2016. The data was gathered from Saint Louis Fed, whereas Standard and Poor’s 500 (S&P 500 index at a closing price of the first day of the month) was from Yahoo Finance. The software used for the data analysis was R Studio and statistical methods such as descriptive statistics, Generalized Method of Moments (GMM) model Fitting and Consumption Capital Asset Pricing Model (CCAPM) Fitting was performed to examine the influence of investment decisions and consumption on asset pricing.
Main Findings: The finding of the study shows that Personal Consumption Expenditures: Nondurable Goods (PCE): Nondurable goods, (PCEN) and 1-Year Treasury Constant Maturity Rate (GS1) jointly accounted for about 7.9% of the variance observable in excess return SP500. Furthermore, independently, GS1 (annualized 1-Year Treasury Constant Maturity Rate) was significant while PCE (Personal Consumption Expenditures: Nondurable Goods) and PCEN: Nondurable goods were insignificant.
The implication of the Study: The current study is useful for investors and especially fund managers across the globe to determine what return they expect on their investment for putting their capital at risk on it.
Novelty/Originality of this study: Studies have been conducted to analyze the impact of investment decision based on the CAPM model, whereas this study introduces the influence of investment decisions and consumption on asset pricing by deploying the CCAPM approach which is an extension of the capital asset pricing model that uses a consumption beta instead of a market beta to explain expected return premiums over the risk-free rate.
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- Acharya, V., Pedersen, L. (2015). Asset pricing with liquidity risk. Journal of Financial Economics, Forthcoming, 2(77), 375–410. https://doi.org/10.1016/j.jfineco.2004.06.007 DOI: https://doi.org/10.1016/j.jfineco.2004.06.007
- Allen, F., & Gale, D. (2013). Bubbles and crises. The Economic Journal, 110(460), 236-255. https://doi.org /10.1111/1468-0297.00499 DOI: https://doi.org/10.1111/1468-0297.00499
- Amihud, Y. (2012). Illiquidity and stock returns cross-section and time-series effects. Journal of Financial Markets, 5:31-56. https://doi.org/10.1016/S1386-4181(01)00024-6 DOI: https://doi.org/10.1016/S1386-4181(01)00024-6
- Aoki, K., Proudman, J., & Vlieghe, G. (2004). House prices, consumption, and monetary policy: a financial accelerator approach. Journal of Financial intermediation, 13(4), 414-435. https://doi.org/10.1016 /j.jfi.2004.06.003 DOI: https://doi.org/10.1016/j.jfi.2004.06.003
- Bach, C., & Moller, S.V. (2011). Habit-based asset pricing with limited participation consumption. Journal of Banking and Finance, 35(11), 2891-290. https://doi.org/10.1016/j.jbankfin.2011.03.014 DOI: https://doi.org/10.1016/j.jbankfin.2011.03.014
- Basu, S. (1983). The relationship between earnings yield, market value, and return for NSE common stocks: further evidence. Journal of Financial Economics, 12, 129-156. https://doi.org/10.1016/0304-405X(83)90031-4 DOI: https://doi.org/10.1016/0304-405X(83)90031-4
- Breeden, D. T. (2015). An intertemporal asset pricing model with stochastic consumption and investment opportunities. In Theory of Valuation (pp. 53-96). https://doi.org/10.1142/9789812701022_0003 DOI: https://doi.org/10.1142/9789812701022_0003
- Chan, L.K., Hamao, Y. & Lakonishok, J. (2014). Fundamentals and stock returns in Japan. Journal of Finance, 46, 1739-1789. https://doi.org/10.1111/j.1540-6261.1991.tb04642.x DOI: https://doi.org/10.1111/j.1540-6261.1991.tb04642.x
- Chopra,N., J., Lakonishok, and Ritter, J. (1992). Measuring abnormal performance: do stocks overreact? Journal of Financial Economics, 31, 235-268. https://doi.org/10.1016/0304-405X(92)90005-I DOI: https://doi.org/10.1016/0304-405X(92)90005-I
- Christiano, L. J., Eichenbaum, M., & Evans, C. L. (2015). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1-45. https://doi.org/10.1086/426038 DOI: https://doi.org/10.1086/426038
- Estrada, Javier. (2017). Mean-semivariance behavior: downside risk and capital asset pricing. International Review of Economics Finance, 16(2), 169-185. https://doi.org/10.1016/j.iref.2005.03.003 DOI: https://doi.org/10.1016/j.iref.2005.03.003
- Fernando, P. & Vicente, B. J., Johnson, P., Alex, G. (2019). Beta = 1 does a better job than calculated betas, IESE Business School, May 19, 2019, 1-20.
- Galagedera, U.A. (2016). An alternative perspective on the relationship between downside beta and CAPM beta. Emerging Markets Review, 8(1), 4-19. https://doi.org/10.1016/j.ememar.2006.09.010 DOI: https://doi.org/10.1016/j.ememar.2006.09.010
- Garcia, Rene, Renault, Eric, Semenov, Andrei. (2015). A Consumption CAPM with a reference level, Universite de Montreal, Working, Paper.
- Grandes, Martin, Panigo, Demian, Pasquini, Ricardo. (2016). The cost of equity beyond CAPM: evidence from Latin American Stocks (1986-2004). Center for Financial Stability, 25(8): 97-107.
- Gregoriou, A., & Ioannidis, C.C. (2016). Generalized method of moments and value tests of the consumption-capital asset pricing model under transactions. Empirical Economics, 32(1), 19-39. https://doi.org/1 0.1007/s00181-006-0070-9 DOI: https://doi.org/10.1007/s00181-006-0070-9
- Gunnlaugsson S. B.(2017). A test of the CAPM on the Icelandic Stock Market. Lex et Scientia, 14(1), 193-199.
- Iqbal, Javed, Brooks, Robert. (2006). Alternative beta risk estimators and asset pricing tests in emerging markets: the case of Pakistan. Journal of Multinational Financial Management, 17(1), 75-93. https://doi.org/10.1016/j.mulfin.2006.04.001 DOI: https://doi.org/10.1016/j.mulfin.2006.04.001
- Husain, U., & Javed, S. (2019). Impact of climate change on agriculture and Indian economy: a quantitative research perspective from 1980 to 2016. Ind Eng Manage, 8(3), 176-199.
- Husain, U., & Javed, S. (2019). Stock price movement and volatility in Muscat security market. International Journal of Research, 7(2), 68-84. https://doi.org/10.29121/granthaalayah.v7.i2.2019.995 DOI: https://doi.org/10.29121/granthaalayah.v7.i2.2019.995
- Lewellen, J., Nagel, S. (2016). The conditional CAPM does not explain asset-pricing anomalies. Journal of Financial Economics, 82(2), 289-314. https://doi.org/10.1016/j.jfineco.2005.05.012 DOI: https://doi.org/10.1016/j.jfineco.2005.05.012
- Ito, M. & Noda, A. (2011). CCAPM with Time-Varying Parameters: Some Evidence from Japan. Keio Economics Society Discussions Paper Series, 11-4.
- Javed, S., Aldalaien, B. A., Husain, U., & Khan, M. S. (2019). Impact of federal funds rate on monthly stocks return of United States of America. International Journal of Business and Management, 14(9). https://doi.org/1 0.5539/ijbm.v14n9p105 DOI: https://doi.org/10.5539/ijbm.v14n9p105
- Khan, K. M., Khan, A. M., Ullah M., Usman, A., Farhat, S., (2020). Closing price determination; extent of manipulation and deterrent strategy formulation: a case of Pakistan Stock Exchange. Journal of Critical Reviews, 7(14), 2689-2705.
- Minovic, J. Z., Zivkovic, B. R. (2010). Open issues in testing liquidity in frontier financial markets: the case of Serbia. Economic Annals, 7(185), 33-62. https://doi.org/10.2298/EKA1085033M DOI: https://doi.org/10.2298/EKA1085033M
- Pastor, L., Stambaugh, R. F., (2013). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642-684. https://doi.org/10.1086/374184 DOI: https://doi.org/10.1086/374184
- Rogers, P., Securato, J. R. (2019). Comparative study on the Brazilian market of the capital asset Pricing model capm fama and french 3factors model and reward beta approach. 3(1), 159-179.
- Shaikh, S., Channar, P., Shaikh, M., &, Ullah, M., (2021). Financial constraints and listed sugar mills on Pakistan Stock Exchange. International Journal of Management, 12(3), 70-76. https://doi.org/10. 29270/JBS.12.2(2018).0118
- Ullah, M., Shaikh, M., Channar, P., & Shaikh, S., (2021). Financial forecasting: an individual perspective. International Journal of Management, 12(3), 60-69.
- Ullah, M., Malik., A.M., Zeb, A., Rehman, A. (2019). Mediating role of capital structure between corporate governance and risk. Journal of Managerial Sciences,13 (3), 47-56.
- Xu-song, XU, Cheng-qi. (2008). Capital asset pricing model with generalized elliptical distribution, systems engineering. Theory and Practice, 28(1), 17-23. https://doi.org/10.1016/S1874-8651(09)60004-1 DOI: https://doi.org/10.1016/S1874-8651(09)60004-1
References
Acharya, V., Pedersen, L. (2015). Asset pricing with liquidity risk. Journal of Financial Economics, Forthcoming, 2(77), 375–410. https://doi.org/10.1016/j.jfineco.2004.06.007 DOI: https://doi.org/10.1016/j.jfineco.2004.06.007
Allen, F., & Gale, D. (2013). Bubbles and crises. The Economic Journal, 110(460), 236-255. https://doi.org /10.1111/1468-0297.00499 DOI: https://doi.org/10.1111/1468-0297.00499
Amihud, Y. (2012). Illiquidity and stock returns cross-section and time-series effects. Journal of Financial Markets, 5:31-56. https://doi.org/10.1016/S1386-4181(01)00024-6 DOI: https://doi.org/10.1016/S1386-4181(01)00024-6
Aoki, K., Proudman, J., & Vlieghe, G. (2004). House prices, consumption, and monetary policy: a financial accelerator approach. Journal of Financial intermediation, 13(4), 414-435. https://doi.org/10.1016 /j.jfi.2004.06.003 DOI: https://doi.org/10.1016/j.jfi.2004.06.003
Bach, C., & Moller, S.V. (2011). Habit-based asset pricing with limited participation consumption. Journal of Banking and Finance, 35(11), 2891-290. https://doi.org/10.1016/j.jbankfin.2011.03.014 DOI: https://doi.org/10.1016/j.jbankfin.2011.03.014
Basu, S. (1983). The relationship between earnings yield, market value, and return for NSE common stocks: further evidence. Journal of Financial Economics, 12, 129-156. https://doi.org/10.1016/0304-405X(83)90031-4 DOI: https://doi.org/10.1016/0304-405X(83)90031-4
Breeden, D. T. (2015). An intertemporal asset pricing model with stochastic consumption and investment opportunities. In Theory of Valuation (pp. 53-96). https://doi.org/10.1142/9789812701022_0003 DOI: https://doi.org/10.1142/9789812701022_0003
Chan, L.K., Hamao, Y. & Lakonishok, J. (2014). Fundamentals and stock returns in Japan. Journal of Finance, 46, 1739-1789. https://doi.org/10.1111/j.1540-6261.1991.tb04642.x DOI: https://doi.org/10.1111/j.1540-6261.1991.tb04642.x
Chopra,N., J., Lakonishok, and Ritter, J. (1992). Measuring abnormal performance: do stocks overreact? Journal of Financial Economics, 31, 235-268. https://doi.org/10.1016/0304-405X(92)90005-I DOI: https://doi.org/10.1016/0304-405X(92)90005-I
Christiano, L. J., Eichenbaum, M., & Evans, C. L. (2015). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1), 1-45. https://doi.org/10.1086/426038 DOI: https://doi.org/10.1086/426038
Estrada, Javier. (2017). Mean-semivariance behavior: downside risk and capital asset pricing. International Review of Economics Finance, 16(2), 169-185. https://doi.org/10.1016/j.iref.2005.03.003 DOI: https://doi.org/10.1016/j.iref.2005.03.003
Fernando, P. & Vicente, B. J., Johnson, P., Alex, G. (2019). Beta = 1 does a better job than calculated betas, IESE Business School, May 19, 2019, 1-20.
Galagedera, U.A. (2016). An alternative perspective on the relationship between downside beta and CAPM beta. Emerging Markets Review, 8(1), 4-19. https://doi.org/10.1016/j.ememar.2006.09.010 DOI: https://doi.org/10.1016/j.ememar.2006.09.010
Garcia, Rene, Renault, Eric, Semenov, Andrei. (2015). A Consumption CAPM with a reference level, Universite de Montreal, Working, Paper.
Grandes, Martin, Panigo, Demian, Pasquini, Ricardo. (2016). The cost of equity beyond CAPM: evidence from Latin American Stocks (1986-2004). Center for Financial Stability, 25(8): 97-107.
Gregoriou, A., & Ioannidis, C.C. (2016). Generalized method of moments and value tests of the consumption-capital asset pricing model under transactions. Empirical Economics, 32(1), 19-39. https://doi.org/1 0.1007/s00181-006-0070-9 DOI: https://doi.org/10.1007/s00181-006-0070-9
Gunnlaugsson S. B.(2017). A test of the CAPM on the Icelandic Stock Market. Lex et Scientia, 14(1), 193-199.
Iqbal, Javed, Brooks, Robert. (2006). Alternative beta risk estimators and asset pricing tests in emerging markets: the case of Pakistan. Journal of Multinational Financial Management, 17(1), 75-93. https://doi.org/10.1016/j.mulfin.2006.04.001 DOI: https://doi.org/10.1016/j.mulfin.2006.04.001
Husain, U., & Javed, S. (2019). Impact of climate change on agriculture and Indian economy: a quantitative research perspective from 1980 to 2016. Ind Eng Manage, 8(3), 176-199.
Husain, U., & Javed, S. (2019). Stock price movement and volatility in Muscat security market. International Journal of Research, 7(2), 68-84. https://doi.org/10.29121/granthaalayah.v7.i2.2019.995 DOI: https://doi.org/10.29121/granthaalayah.v7.i2.2019.995
Lewellen, J., Nagel, S. (2016). The conditional CAPM does not explain asset-pricing anomalies. Journal of Financial Economics, 82(2), 289-314. https://doi.org/10.1016/j.jfineco.2005.05.012 DOI: https://doi.org/10.1016/j.jfineco.2005.05.012
Ito, M. & Noda, A. (2011). CCAPM with Time-Varying Parameters: Some Evidence from Japan. Keio Economics Society Discussions Paper Series, 11-4.
Javed, S., Aldalaien, B. A., Husain, U., & Khan, M. S. (2019). Impact of federal funds rate on monthly stocks return of United States of America. International Journal of Business and Management, 14(9). https://doi.org/1 0.5539/ijbm.v14n9p105 DOI: https://doi.org/10.5539/ijbm.v14n9p105
Khan, K. M., Khan, A. M., Ullah M., Usman, A., Farhat, S., (2020). Closing price determination; extent of manipulation and deterrent strategy formulation: a case of Pakistan Stock Exchange. Journal of Critical Reviews, 7(14), 2689-2705.
Minovic, J. Z., Zivkovic, B. R. (2010). Open issues in testing liquidity in frontier financial markets: the case of Serbia. Economic Annals, 7(185), 33-62. https://doi.org/10.2298/EKA1085033M DOI: https://doi.org/10.2298/EKA1085033M
Pastor, L., Stambaugh, R. F., (2013). Liquidity risk and expected stock returns. Journal of Political Economy, 111(3), 642-684. https://doi.org/10.1086/374184 DOI: https://doi.org/10.1086/374184
Rogers, P., Securato, J. R. (2019). Comparative study on the Brazilian market of the capital asset Pricing model capm fama and french 3factors model and reward beta approach. 3(1), 159-179.
Shaikh, S., Channar, P., Shaikh, M., &, Ullah, M., (2021). Financial constraints and listed sugar mills on Pakistan Stock Exchange. International Journal of Management, 12(3), 70-76. https://doi.org/10. 29270/JBS.12.2(2018).0118
Ullah, M., Shaikh, M., Channar, P., & Shaikh, S., (2021). Financial forecasting: an individual perspective. International Journal of Management, 12(3), 60-69.
Ullah, M., Malik., A.M., Zeb, A., Rehman, A. (2019). Mediating role of capital structure between corporate governance and risk. Journal of Managerial Sciences,13 (3), 47-56.
Xu-song, XU, Cheng-qi. (2008). Capital asset pricing model with generalized elliptical distribution, systems engineering. Theory and Practice, 28(1), 17-23. https://doi.org/10.1016/S1874-8651(09)60004-1 DOI: https://doi.org/10.1016/S1874-8651(09)60004-1