Abstract
Testing consumption-based asset pricing models is a triple hypothesis, which, besides considering alternative consumption measures, requires examining the assumptions for investor preferences and consumption dynamics. We formalize the triple-hypothesis problem in a GMM framework that relaxes the CRRA assumption, jointly estimates consumption growth dynamics with Euler equations, and includes the variance of the risk-free rate as a target moment. We find that using alternative consumption measures like garbage does not address the empirical shortcomings of the canonical model with CRRA preferences and i.i.d. consumption growth. Instead, a model with Epstein-Zin preferences, non-i.i.d. consumption dynamics, and BEA consumption performs equally well.
Includes bibliographical references (pages 40-41).