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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
Affiliation:
Federal Reserve Bank of Minneapolis

Abstract

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

Information

Type
Research Article
Copyright
© 1997 Cambridge University Press

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