Consumption equilibrium asset pricing in two Asian emerging markets

Consumption equilibrium asset pricing in two Asian emerging markets Article

Chen, MH, Bidarkota, PV. (2004). Consumption equilibrium asset pricing in two Asian emerging markets . 15(2), 305-319. 10.1016/j.asieco.2004.02.004

We study two Asian emerging financial markets (Korea and Taiwan) using the Consumption-based Capital Asset Pricing Model (CCAPM) of Lucas [Econometrica 46 (1978) 1429]. A cointegration test reveals no long-term relationship between equity prices and dividends in these two countries. The applicability of the CCAPM seems weak in both markets, especially in Taiwan. The highly volatile dividend growth rates nonetheless cannot rationalize the large equity premia (the equity premium puzzle) in both emerging markets. We do not find the risk-free rate puzzle in Korea and, to the contrary, the mean model-implied risk-free rate is much higher than the historical figure in Taiwan. © 2004 Elsevier Inc. All rights reserved.