Empirical Test of the Relationship between Consumption and Capital Asset Pricing in Tehran Stock Exchange

The purpose of this paper is to derive a better criterion for systematic risk and to develop a closer relationship between the capital market and basic economic concepts and to explain the relationship between risk and return and pricing of capital assets using the economic variable of consumption in Tehran Stock Exchange. The capital asset pricing model assumes that investors consider only risk and return. But other features may also be important to investors. For example, one of these important features may be the consumption flow over the life of the investor. The premise of the consumption-based capital asset pricing model is that what matters to investors is the flow of consumption over a lifetime, not wealth itself. Therefore, a better measure of consumer welfare instead of wealth is the consumption flow that can support this welfare. This article examines whether consumption beta compared to market beta can be considered as a better criterion for explaining returns on the Tehran Stock Exchange.

According to the assumption governing the pricing model of consumption-based capital assets, we calculate the covariance between stock returns and total consumption to measure risk premium. Instead of calculating risk premium based on the covariance of stock returns with market returns - a measure that focuses only on wealth. One reason that the results of this research can be used in the decision-making process, this research is applied in terms of purpose. This research is also descriptive-correlational in nature, because in this type of research, the researcher seeks to evaluate the relationship between two or more variables. To investigate the issue, based on the regression method, data of 154 companies listed on the Tehran Stock Exchange during the period 2006-2016 have been extracted from the Rahvard novin software. Also, the consumption cost index has been obtained by using the information of the price index of consumer goods and services in urban areas of Iran, listed on the website of the Central Bank of the Islamic Republic of Iran.

Findings of the study reject the greater power of the C-CAPM model using the consumption function portfolio compared to the CAPM model in explaining the expected real returns of the Tehran Stock Exchange. According to the results, neither model is suitable for estimating the efficiency, but due to the fact that the amount of error in the CAPM model is less than the C-CAPM model, therefore the CAPM model has better explanatory power than the C-CAPM model. Another research hypothesis that the C-CAPM model beta is a better predictor of performance than the CAPM model beta is also rejected.

The results of the above study show that the CAPM model has performed better than the C-CAPM model, so it is not important to consider the consumption variable in predicting risk and stock returns. Therefore, it is recommended that investors do not use the consumption factor to estimate future stock returns. One of the limitations of the research is that the superiority of the CAPM model is not a reason for its comprehensiveness in the Tehran Stock Exchange, because based on the research results, this model explains a small part of the factors affecting the return.