In this paper we test for the inclusion of the bid-ask spread in the consumption
CAPM, in the UK stock market over the time period of 1980-2000. Two
econometric models are used; first, Fisher’s (1994) asset pricing model is
estimated by GMM, and secondly, the VAR approach proposed by Campbell and
Shiller is extended to include the bid-ask spread. Overall the statistical tests are
unable to reject the bid-ask spread as an independent explanatory variable in the
C-CAPM. This leads to the conclusion that transactions costs should be included
in asset pricing models
