Scandinavian Working Papers in Business Administration
Finance Working Papers,
University of Aarhus, Aarhus School of Business, Department of Business Studies
No 00-10: Evaluating the C-CAPM and the Equity Premium Puzzle at Short and Long Horizons: A Markovian Bootstrap Approach.
Tom Engsted (), Enno Mammen and Carsten Tanggaard ()
Additional contact information
Tom Engsted: Department of Finance, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Enno Mammen: Institute für Angewandte Mathematik, Postal: Ruprecht-Karls-Universität, Heidelberg, Germany
Carsten Tanggaard: Department of Finance, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark
Abstract: We investigate the C-CAPM and the equity premium puzzle using asset returns and consumption data from the US and Denmark. In contrast to previous studies the investigation is carried out with both short and long investment horizons. In addition, we introduce a Markovian bootstrap approach to calculate the finite-sample distributions of the various test statistics used. Among other things, our approach allows testing the hypothesis of no pricing errors based on the Hansen and Jagannathan (1997) specification error measure, which is not possible based on asymptotic approximations. The analysis shows that there are large differences between US and Danish asset markets, and also to some extent differences depending on the length of the investment horizon. In addition, with a long investment horizon, the asymptotic and bootstrap estimated distributions often differ markedly. We also find that althrough the Hansen-Jagannathan specification error measure points to large pricing errors, when we account properly (using the bootstrap approach) for sampling error, there is no evidence against the C-CAPM with CRRA utility in neither the US nor Danish data. However, the bootstrap based tests of a zero-mean risk-adjusted equity premium clearly reject the model on US data.
Keywords: Hansen-Jagannathan bounds; Heavy-tailed pricing errors; Bootstrap simulations
49 pages, April 1, 2000
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