Are consumption-based intertemporal capital asset pricing models structural?

Abstract

Hansen and Singleton (1982) and Dunn and Singleton (1986) have found supporting evidence for the overidentifying restrictions of two empirical consumption-based asset pricing models, when estimated with a particular set of single asset returns. In this paper, we submit these models to further scrutiny by testing whether they exhibit (structural) stability. A series of tests, recently developed by Ghysels and Hall (1990), are applied and a test for structuralinvariance is introduced based on the likelihood ratio type test procedure of Eichenbaum, Hansen, and Singleton (1988). There are a number of reasons why structural stability tests are particularly appropriate for diagnostic testing of Euler equation models, namely: (1) the Lucas econometric policy evaluation critique; (2) Euler equations are only a partial description of the data-generating process and parameter stability is one of the few assumptions imposed in their estimation via the generalized method of moments; and finally (3) it is demonstrated that Hansen's overidentifying restrictions test has no power against a class of local alternatives characterized by a parameter drift.