Sergei Sarkissian
This dissertation studies the impact of heterogeneous consumption
growth rates across countries on cross-country differences in expected asset returns
and tests on the country level the implications of the Constantinides and
Duffie (1996) CCAPM which accounts for the investors’ heterogeneity and
existence of incomplete markets. The inclusion of the cross-country dispersion
of countries’ per-capita consumption growth rates into the standard power
utility model has a positive impact on the ability of the model to resolve the
risk-free rate, equity premium, and forward premium puzzles. The estimates of
the risk aversion parameter are lower, the standard errors are generally
smaller, and the time preference parameter decreases towards unity. In addition,
the consumption model with heterogeneity
leads to a decrease in the estimates of the Hansen and Jagannathan (1997) distance
measure for all types of assets and of most average pricing errors. The tests
of the beta pricing relation derived from the original model reveal that more
realistic parameter estimates and better overall fit of the new model are
achieved primarily due to the negative relation between expected asset returns
and the covariance of asset returns with the cross-country consumption
dispersion.
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