Generalized method of moments and present value tests of the consumption-capital asset pricing model under transactions costs: evidence from the UK stock market |
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Authors: | Andros Gregoriou Christos Ioannidis |
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Institution: | (1) Department of Economics and Finance, Brunel University, Uxbridge, Middlesex, UB8 3PH, UK;(2) School of Management, University of Bath, Bath, BA2 7AY, UK |
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Abstract: | 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 (in J Appl Econometrics 9:S71–S94, 1994) asset pricing
model is estimated by GMM. We obtain plausible values of all the structural parameters and transactions costs. We subsequently
test the robustness of our results by extending the VAR approach proposed by Campbell and Shiller (in Rev Financ Stud 1:195–228,
1988). This is achieved with the inclusion of the normalised bid–ask spread as an independent variable in the pricing equation.
Overall, the statistical tests are unable to reject the bid–ask spread as an independent explanatory variable in the C-CAPM.
In addition, in the VAR specification we find that both the normalised and the absolute bid–ask spread is a significant predictor
of the dividend to price ratio. The paper’s main conclusion is that transaction costs should be included in asset pricing
models, as they possess independent explanatory power.
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Keywords: | Asset pricing Bid– ask spreads GMM VAR |
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