Multifactor consumption based asset pricing models using the US stock market as a reference: Evidence from a panel of developed economies

This article was submitted and presented at the European Economics and Finance Society Conference, 2012, at Koç University, Istanbul, and the final version was published in a Special Section of Economic Modelling. The special section editor was John Hunter from Brunel University London.In this paper we extend the time series analysis to the panel framework to test the C-CAPM driven by wealth references for developed countries. Speci cally, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error com- ponents. The empirical findings of this two-factor model with various specifications all indicate that there is significant unobserved heterogeneity captured by cross-country fixed e¤ects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects