The Empirical Relationship Between Aggregate Consumption and Security Prices in Australia

Previous evidence on the consumption based CAPM (CCAPM) is predominantly US-based and no prior work in Australia has been published. This paper provides such an empirical examination using monthly and quarterly Australian equity return and consumption data. Multivariate tests of the CCAPM using actual quarterly consumption data indicate good support for the CCAPM. Positive and statistically significant (albeit small) estimates of the market price of consumption beta risk are found, in a second phase of tests, four versions of the maximum correlation portfolio (MCP) are used to proxy the consumption variable using monthly data. Generally, the results of these tests are very mixed, and their interpretation is further confused by the recognition of several joint test aspects of the analysis. Finally, for non-nested tests of the CCAPM versus the CAPM, the evidence favours the traditional CAPM using quarterly data, but is inconclusive using monthly data.