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Alternative Tests of the Zero-Beta CAPM

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  • Chou, Pin-Huang
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    Abstract

    In this paper I develop an analytical Wald test of the zero-beta capital asset pricing model (CAPM) in a simple iid (independent and identically distributed) setting and extend the Wald test to the generalized method of moments (GMM) framework that allows for a general form of serial correlation and conditional heteroskedasticity. The size and power of these tests, along with some existing tests, are investigated under normal errors and other alternative distributional specifications. The results show that, under alternative distributional assumptions for the error terms, the proposed Wald and GMM tests have reliable sizes for medium-size samples, whereas the likelihood ratio test (LRT) rejects the efficiency too often, especially when the error terms significantly deviate from normality. However, the LRT is more powerful than both the Wald and GMM tests.

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    Bibliographic Info

    Article provided by Southern Finance Association & Southwestern Finance Association in its journal Journal of Financial Research.

    Volume (Year): 23 (2000)
    Issue (Month): 4 (Winter)
    Pages: 469-93

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    Handle: RePEc:bla:jfnres:v:23:y:2000:i:4:p:469-93

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0270-2592
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    Web page: http://www.southwesternfinance.org/
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    Cited by:
    1. DUFOUR, Jean-Marie & KHALAF, Lynda & BEAULIEU, Marie-Claude, 2003. "Finite-Sample Diagnostics for Multivariate Regressions with Applications to Linear Asset Pricing Models," Cahiers de recherche 2003-08, Universite de Montreal, Departement de sciences economiques.
    2. DUFOUR, Jean-Marie & KHALAF, Lynda & BEAULIEU, Marie-Claude, 2003. "Exact Skewness-Kurtosis Tests for Multivariate Normality and Goodness-of-Fit in Multivariate Regressions with Application to Asset Pricing Models," Cahiers de recherche 07-2003, Centre interuniversitaire de recherche en ├ęconomie quantitative, CIREQ.
    3. Javed Iqbal & Robert Brooks & Don Galagedera, 2010. "Multivariate tests of asset pricing: simulation evidence from an emerging market," Applied Financial Economics, Taylor & Francis Journals, vol. 20(5), pages 381-395.
    4. Iqbal, Javed & Brooks, Robert & Galagedera, Don UA, 2007. "Robust Tests of the Lower Partial Moment Asset Pricing Model in Emerging Markets," MPRA Paper 25349, University Library of Munich, Germany, revised May 2007.

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