Abstract
This paper tests the consumption capital asset pricing model on American quarterly data. To address the empirical failure of the CCAPM, considerable attention has been devoted to market frictions as well as alternative utility specifications. Both of these strands can claim some success, but they have until now been considered separately. The focus of this study is therefore to consider both in the same study. Furthermore, market frictions have in the previous literature been found to have a potentially large impact. However, a weak test based on the Hansen and Jagannathan bound, which only gives a necessary condition for model correctness, has been used. To shed further light on the issue, we therefore consider the same authors’ measure test, which is based on a condition that is both necessary and sufficient. Finite sample versions of the tests will also be used since the asymptotic distribution has been shown to be a poor approximation for the sample sizes considered in this study. Different utility specifications are found to have considerably less impact than the introduction of market frictions, which in general has a significant impact, and the model is often accepted.