Abstract
In this paper we test for the inclusion of the bid–ask spread in the consumption CAPM, in the UK stock market over the time period of 1980–2000. Two econometric models are used: first, Fisher’s (in J Appl Econometrics 9:S71–S94, 1994) asset pricing model is estimated by GMM. We obtain plausible values of all the structural parameters and transactions costs. We subsequently test the robustness of our results by extending the VAR approach proposed by Campbell and Shiller (in Rev Financ Stud 1:195–228, 1988). This is achieved with the inclusion of the normalised bid–ask spread as an independent variable in the pricing equation. Overall, the statistical tests are unable to reject the bid–ask spread as an independent explanatory variable in the C-CAPM. In addition, in the VAR specification we find that both the normalised and the absolute bid–ask spread is a significant predictor of the dividend to price ratio. The paper’s main conclusion is that transaction costs should be included in asset pricing models, as they possess independent explanatory power.
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Gregoriou, A., Ioannidis, C. Generalized method of moments and present value tests of the consumption-capital asset pricing model under transactions costs: evidence from the UK stock market. Empirical Economics 32, 19–39 (2007). https://doi.org/10.1007/s00181-006-0070-9
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DOI: https://doi.org/10.1007/s00181-006-0070-9