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On the power of cross-sectional and multivariate tests of the CAPM

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  • Grauer, Robert R.
  • Janmaat, Johannus A.

Abstract

This paper examines the power of the cross-sectional and multivariate tests of the CAPM under ideal conditions. When the CAPM is true the positively weighted market portfolio is MV-efficient and securities plot on the security market line. When the CAPM is false an alternative asset pricing model determines prices. An examination of the population intercepts, slopes and R2 from cross-sectional regressions of expected returns on betas indicates that all three are unreliable indicators of whether the CAPM holds. Simulation analysis of the power of the cross-sectional tests expands on and reinforces the analysis based on the population values. The Gibbons et al. (1989) multivariate test fares much better.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 5 (May)
Pages: 775-787

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Handle: RePEc:eee:jbfina:v:33:y:2009:i:5:p:775-787

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Web page: http://www.elsevier.com/locate/jbf

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Keywords: Portfolio choice Asset pricing Econometric and statistical methods;

References

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Citations

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Cited by:
  1. Ronald J. Balvers & Dayong Huang, 2005. "Evaluation Of Linear Asset Pricing Models By Implied Portfolio Performance," Working Papers 05-06 Classification- JEL, Department of Economics, West Virginia University.
  2. Raymond Kan & Cesare Robotti & Jay Shanken, 2009. "Pricing model performance and the two-pass cross-sectional regression methodology," Working Paper, Federal Reserve Bank of Atlanta 2009-11, Federal Reserve Bank of Atlanta.
  3. Lozano, Martín & Rubio, Gonzalo, 2011. "Evaluating alternative methods for testing asset pricing models with historical data," Journal of Empirical Finance, Elsevier, Elsevier, vol. 18(1), pages 136-146, January.
  4. Murtazashvili, Irina & Vozlyublennaia, Nadia, 2012. "The role of data limitations, seasonality and frequency in asset pricing models," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 22(3), pages 555-574.
  5. Gray, Philip & Johnson, Jessica, 2011. "The relationship between asset growth and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(3), pages 670-680, March.
  6. Hwang, Young-Soon & Min, Hong-Ghi & McDonald, Judith A. & Kim, Hwagyun & Kim, Bong-Han, 2010. "Using the credit spread as an option-risk factor: Size and value effects in CAPM," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(12), pages 2995-3009, December.
  7. Balduzzi, Pierluigi & Robotti, Cesare, 2008. "Mimicking Portfolios, Economic Risk Premia, and Tests of Multi-Beta Models," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 26, pages 354-368.
  8. Orbe Mandaluniz, Susan & Ferreira García, María Eva & Gil Bazo, Javier, 2010. "Conditional beta pricing models: A nonparametric approach," BILTOKI, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística) 2010-10, Universidad del País Vasco - Departamento de Economía Aplicada III (Econometría y Estadística).
  9. Grauer, Robert R. & Janmaat, Johannus A., 2010. "Cross-sectional tests of the CAPM and Fama-French three-factor model," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(2), pages 457-470, February.
  10. Huang, Dayong & Wang, Fang, 2009. "Cash, investments and asset returns," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(12), pages 2301-2311, December.
  11. Murtazashvili, Irina & Vozlyublennaia, Nadia, 2012. "The performance of cross-sectional regression tests of the CAPM with non-zero pricing errors," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(4), pages 1057-1066.
  12. Darolles, Serge & Gourieroux, Christian, 2010. "Conditionally fitted Sharpe performance with an application to hedge fund rating," Journal of Banking & Finance, Elsevier, Elsevier, vol. 34(3), pages 578-593, March.
  13. Madalina - Gabriela Anghel & Liliana (Dinca) Paschia, 2013. "Using The Capm Model To Estimate The Profitability Of A Financial Instrument Portfolio," Annales Universitatis Apulensis Series Oeconomica, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, Faculty of Sciences, "1 Decembrie 1918" University, Alba Iulia, vol. 2(15), pages 19.

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