An Alternative Testable Form of the Consumption CAPM



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    • Department of General Business & Finance, School of Management, University of Massachusetts at Amherst. I would like to thank seminar participants at the University of Michigan and the University of Massachusetts and an anonymous referee for their many helpful comments. I remain responsible for any remaining errors.


This paper develops a consumption-oriented model of asset prices in a multigood economy that is, in principle, testable even when aggregate consumption of goods and their market prices are only partially observable. Previous studies show that, when there are m consumption goods, equilibrium expected excess returns on securities are functions of their covariances with m+1 variables—aggregate consumption expenditure and market prices of consumption goods. Without making any further assumptions, the present model shows that a similar equilibrium relationship can be expressed in terms of covariances of asset returns with the following m+1 variables: market prices of k consumption goods and aggregate consumption of m+1k goods. Because the author's result provides researchers with some flexibility in choosing the set of m+1 variables that measure riskiness of securities, it should lead to more powerful tests of the model.