Multifactor Consumption Based Asset Pricing Models Using the US Stock Market as a Reference : Evidence from a Panel of Developed Economies

In this paper we extend the time series analysis to the panel frame-work to test the C-CAPM driven by wealth references for developed countries. Speci fically, we focus on a linearised form of the Consumption-based CAPM in a pooled cross section panel model with two-way error components. The empirical fi ndings of this two-factor model with various speci fications all indicate that there is signi ficant unobserved heterogeneity captured by cross-country fixed effects when consumption growth is treated as a common factor, of which the average risk aversion coefficient is 4.285. However, the cross-sectional impact of home consumption growth varies dramatically over the countries, where unobserved heterogeneity of risk aversion can also be addressed by random effects