INFLUENCE OF INVESTMENT DECISIONS AND CONSUMPTION ON ASSET PRICING: CCAPM APPROACH

Abstract

Purpose of the study: This study examines the influence of investment decisions and consumption on asset pricing from 1980 to 2016. Methodology: This study has used a quantitative research design and a secondary source is deployed to collect data from 1980 to 2016. The data was gathered from Saint Louis Fed, whereas Standard and Poor’s 500 (S&P 500 index at a closing price of the first day of the month) was from Yahoo Finance. The software used for the data analysis was R Studio and statistical methods such as descriptive statistics, Generalized Method of Moments (GMM) model Fitting and Consumption Capital Asset Pricing Model (CCAPM) Fitting was performed to examine the influence of investment decisions and consumption on asset pricing. Main Findings: The finding of the study shows that Personal Consumption Expenditures: Nondurable Goods (PCE): Nondurable goods, (PCEN) and 1-Year Treasury Constant Maturity Rate (GS1) jointly accounted for about 7.9% of the variance observable in excess return SP500. Furthermore, independently, GS1 (annualized 1-Year Treasury Constant Maturity Rate) was significant while PCE (Personal Consumption Expenditures: Nondurable Goods) and PCEN: Nondurable goods were insignificant. The implication of the Study: The current study is useful for investors and especially fund managers across the globe to determine what return they expect on their investment for putting their capital at risk on it. Novelty/Originality of this study: Studies have been conducted to analyze the impact of investment decision based on the CAPM model, whereas this study introduces the influence of investment decisions and consumption on asset pricing by deploying the CCAPM approach which is an extension of the capital asset pricing model that uses a consumption beta instead of a market beta to explain expected return premiums over the risk-free rate.