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TESTING THE CONSUMPTION CAPM WITH HEAVY-TAILED PRICING ERRORS

Published online by Cambridge University Press:  02 March 2005

NARAYANA R. KOCHERLAKOTA
NARAYANA R. KOCHERLAKOTA
Affiliation:
Federal Reserve Bank of Minneapolis
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Abstract

Many tests have rejected the implications of the consumption CAPM for data on U.S. asset returns. All of the tests, though, assume that the pricing errors satisfy the Central Limit Theorem. I provide empirical evidence that the marginal distributions of the pricing errors are so heavy-tailed that they do not satisfy the Central Limit Theorem. Using recent work on jackknifing, I construct a method of testing asset pricing models with heavy-tailed errors. Using this procedure, I find that the consumption CAPM is not rejected by annual U.S. data.

Keywords

Heavy TailsJackknifeAsset Pricing
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 3 , September 1997 , pp. 551 - 567
Copyright
© 1997 Cambridge University Press

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