Nirma University Journal of Business and Management Studies
M. Mallikarjun1
1Institute of Management, Nirma University, Ahmedabad, Gujarat, India
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The consumption-based capital asset pricing model (CCAPM) is considered to be one of the ingenuous and most instinctive of all asset-pricing models. Studies by Rubinstein (1976), Breeden and Litzenberger (1978), and Breeden (1979) demonstrate that equilibrium expected excess returns are proportional to their ‘consumption betas’. CCAPM is an extension of the first-order condition for a utility-maximizing individual’s intertemporal consumption and investment choice problem. This contrasts with the market-oriented capital asset pricing model based on a single-period economy by Sharpe (1964, The Journal of Finance, 19, 3, 425-442) and Lintner (1965, Review of Economics and Statistics, 47, 1, 13-37). In this study, two models of CCAPM are tested. The first one replaces the market premium with the growth rate of consumption. The second variant is the canonical consumption-based model proposed by Hansen and Singleton (1982, Econometrica, 50, 5, 269-286). The canonical model imposes the power utility Euler equation under lognormality. By transitioning from the unconstrained linear model to the canonical log-linearized CCAPM, we change the fundamental question we are asking the data. The simple CCAPM measured immediate wallet shocks—how raw, discrete changes in spending correlated with asset returns. The canonical CCAPM measures intertemporal human psychology—how households smooth their proportional consumption over time. This article attempts to provide an empirical comparison across these two models using Consumer Pyramids Household Survey data from the Centre for Monitoring Indian Economy, granular unit-level data. The data collected for the study were monthly, ranging from January 2014 to August 2023. Average consumption expenditure per household across 24 major states and union territories (rural, urban and combined) was considered.
CAPM, CCAPM, Canonical Consumption based Model, Consumption Expenditure
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