EMPIRICAL TESTS OF CONSUMPTION BASED ASSET PRICING MODELS IN SINGAPORE STOCK MARKET

Abstract

We empirically test six consumption based asset pricing models in the Singapore stock market from Jan 1993 to Dec 2018. We run four types of tests with increasing amount of statistical restrictions: Generalized Method of Moments, Ordinary Least Squares, Time Series Regressions and Fama Macbeth regressions. We have two main results. First, we find that the canonical consumption based asset pricing model (“C-CAPM”) is able to explain cross-sectional returns in the Singapore stock market. Our results suggest that the representative agent in Singapore likely has time separable utility function. Second, we find that consumption based asset pricing models can explain cross-sectional portfolio returns better than traditional asset pricing models in the Singapore stock market. The most important set of cross-sectional portfolios are liquidity portfolios due to the illiquid Singapore stock exchange generally. We run several robustness tests with respect to weighting of the portfolios, different classification of portfolios and we find consistent results. Overall, our study provide new evidence that consumption based asset pricing models can explain cross-sectional returns in the Singapore stock market.