APPLICATION OF CONSUMPTION-CAPITAL ASSET PRICING MODEL (C-CAPM)
ABSTRACT
    The Study examines consumption-based capital asset pricing model (C-CAPM) in the Nigerian capital market, using the Generalized Method of Moments (GMM) technique on annual data covering the period 1985 to 2011. Consumption decisions related to assets returns were considered and three assets were selected in the capital market, namely, equity stock returns, returns on corporate bonds and returns on government bonds.
    The results from the analysis show that returns on government bonds have a significant negative impact on consumption decisions in Nigeria; returns on corporate bonds also have slightly significant negative impact on consumption; returns on equity stocks have positive but insignificant impact on consumption in Nigeria. This asset seems to be the only portfolio instrument that may be relevant directing consumption decisions.
    The study recommends among others that the weak transfer of resources between the capital market and the real expenditure sector should be strengthened as this will provide better benefits of the market to the real sector.
TABLE OF CONTENT
CHAPTER ONE: INTRODUCTION
1.1    Background to Study            
1. 2    Statement of the Research Problem        
1.3    Objective of the Study                
1.4    Hypothesis of the Study            
1.5    Significance of the Study    
1.6    Scope of the Study                
1.7    Limitation of the Study        
CHAPTER TWO: LITERATURE REVIEW
2.1    Introduction                
2.2    The Concept of Consumption- Capital Asset Pricing Model                
2.3    Capital Asset Pricing Model: Sharpe-Lintner
Version                        
2.4    Comparing the Consumption-Capital Asset
Pricing Model and the Capital Asset Pricing
Model                        
2.5    Econometric Problems Associated With
Measured Consumption            
2.6    Theoretical Background for the Consumption
Capm Estimation                
2.7    Empirical Evidence                
CHAPTER THREE: METHODOLOGY OF THE STUDY
3.1    Introduction                    
3.2     Model and Method of Estimation            
3.3     Variables and Data Issues                
3.4    Sources of Data                    
CHAPTER FOUR: PRESENTATION AND ANALYSIS OF   DATA
4.1    Introductions                        
4.2.     Descriptive Statistics                 
4.3     Correlation Analysis                    
4.4     Empirical Results on The GMM            
CHAPTER FIVE: SUMMARY OF FINDINGS, RECOMMENDATIONS AND CONCLUSION
5.1     Summary of Findings            
5.2     Recommendations                    
5.3     Conclusion                        
References                     
    Appendix                         
CHAPTER ONE
INTRODUCTION
1.1    BACKGROUND TO THE STUDY
The consumption based capital asset pricing model (C-CAPM) is a financial model that extends the concepts of the capital asset pricing model (CAPM), first developed by Lucas (1978) and Breeden (1979) to include the amount that an individual or firm wishes to consume in the future. The C-CAPM uses consumption measures, in terms of a consumption beta, in its calculation of a given investment's expected return. In its simplest form, the CCAPM differs from the CAPM by only the beta coefficient used in the calculation. The beta for consumption attempts to measure the covariance between an investor's ability to consume goods and services from investments, and the return from a market index. This was also in agreement with that of Chen (2003) that the CAPM uses the asset’s covariance with the stock market as measurements of risk while the C-CAPM uses the covariance of the return with the capital consumption.
    According to Nicolas (2010), C-CAPM is based on the assumption that most people invest with the aim of ensuring future consumption for them and their families. Therefore the CCAPM abandons the assumption that people solely pay attention to their future total wealth. In the consumption model wealth appears implicitly and is not perfectly correlated with market portfolio return. The portfolio returns on assets in the C-CAPM is connected with future consumption.
Osamwonyi, Imafidon and Arowoshegbe (2011), citing Campbell and Cochrane (2000), posited that inter-temporal substitution channel of consumption has been used to explain return on risk free asset and risky asset in a large volume of literature: and in the last two decades, the development of this theory has been marked by a major achievement in the field of financial economics. Arguing further that the model always generates disappointing empirical estimates on time series domain, consumption based model are significantly outperformed by portfolio based CAPM model, which Cochrane (1996) attributed to errors of measurement in consumption data or incorrect specification of representative agent’s preference     
1.2        STATEMENT OF THE RESEARCH PROBLEM
    The consumption base capital asset pricing model (C-CAPM) as developed by Breeden (1979) and Cornell (1981) allows researchers to compare the model with the market oriented CAPM in a coherent and rigorous analytical framework. The study was in agreement with conventional wisdom as exemplified by the works of Rubinstein (1976), Breeden and Litzenberger (1978) and Breeden (1979),  that in an inter-temporal economy, equilibrium expected excess returns are proportional to consumption beta; which was in contrast with the traditional CAPM derived in a single period economy by Sharpe(1964) and Lintner (1965).
    Now, the derivation of the consumption-based capital asset pricing model (C-CAPM) by Rubinstein (1976) is based on the assumption that over a discrete time interval, the joint distribution of all assets return with each individual’s optimal consumption is normal. It was however developed as a follow up to the market-oriented CAPM which have been empirically analyzed with individual securities by Mankius and Shapiro (1985).
    More specifically, the C-CAPM prices assets with respects to changes in aggregate consumption between two points in time. The use of C-CAPM as a more reflective analytical model for an inter temporal capital asset is however not immune to certain constraints as it has to do with measured consumption. It is extremely hard for individuals to accurately measure their total consumption and hence to estimate the model. For this reason,    econometricians are still devising ways to minimize this problem, as there is yet no consensus among them in this regard.
    In view of the foregoing therefore, one cannot draw any minimal conclusion as to the efficacy of the C-CAPM - led returns nexus. Much of this study has not been done in Nigeria; hence, the study will specifically test the application of the consumption based capital asset pricing model (C-CAPM) within the context of the Nigerian capital market, and to see if it outperforms the portfolio based CAPM model.
    Thus, the study seeks to provide answer to the research question below:
(i)    What is the relationship between consumption (as measured by nondurable services) and stock returns in the Nigerian stock market?
(ii)    What is the relationship between consumption and all share index in the Nigerian stock market?
1.3    OBJECTIVE OF THE STUDY
    The objectives of the study are to:
i)    Determine the relationship between consumption (as measured by nondurable services) and stock returns in the Nigerian stock market?
(i)    Determine the relationship between consumption and all share index in the Nigerian stock market?
1.4    HYPOTHESIS OF THE STUDY
    The hypothesis of the study is:
1.     Consumption does not have any significant     impact on stock returns in the Nigerian stock market.
2.    Consumption does not have any significant impact on the all share index in the Nigerian Stock Market.
1.5          SIGNIFICANCE OF THE STUDY
As indicated in the statement of problem, the study will definitely give an insight into the relevance and application of consumption capital asset pricing model in Nigeria.
    The study will also be relevant to all market participants, investors and potential foreign investors on how they can use the consumption based CAPM to invest profitably while minimizing systematic or systemic risk.
Furthermore, the study will be very relevant to the management of the Nigerian capital market, government, corporate bodies and policy makers, as it will provide them useful information and guidelines to formulating appropriate policies and programmes affecting asset risk- returns in Nigeria.
    Again, the academia, researchers, Finance students and other related disciplines will also benefit immensely, as it will also constitute viable data source that will enable them conduct further studies, since the study is relatively a new one in this regard.
1.6          SCOPE OF THE STUDY
    The study is a Nigeria-specific study, covering a period of twenty-seven years (1985 to 2011). The choice of this period is occasioned by the general requirement of time series data, which provides for a long term measurement of financial data in order to avoid spurious results and hence assured the adequacy of data and reliability of results.    
1.7          LIMITATIONS OF THE STUDY
    Generally, no study is without limitation and this study of course is not an exemption. The only limitation is the measurement and estimation of consumption data which often proved to be more difficult to obtain and which Ferson and Harvey (1993) admitted in their discussion paper to have some intricacies in data measurement. However, effort will be made to ensure that errors are minimized so that the results obtained are valid and reliable with respect to the data used.