GMM AND PRESENT VALUE TESTS OF THE C-CAPM - EVIDENCE FROM THE DANISH,GERMAN, SWEDISH AND UK STOCK MARKETS

In this paper we test the consumption oriented capital asset pricing m odel with constant relative risk aversion using long time series data from four European stock markets. Two different methodologies are appl ied: Hansen's GMM method and the VAR approach proposed by Campbell and Shiller. Overall the statistical tests are unable to reject the C-CAP M, and the dividend-price ratio generally predicts future dividend gro wth in the direction implied by the model. However, the estimates of t he relative risk aversion parameter are mostly implausible and impreci se, and the dividend-price ratio tends to predict future consumption g rowth in the wrong direction. Hence, discount rates are time-varying i n a way that is inconsistent with the C-CAPM/CRRA specification. (JEL G12). Copyright (C) 1996 Elsevier Science Ltd