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Assessing asset pricing models using revealed preference

Author

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  • Berk, Jonathan B.
  • van Binsbergen, Jules H.

Abstract

We propose a new method of testing asset pricing models that relies on quantities rather than just prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the risk model that is closest to the model that investors use in making their capital allocation decisions. Using our method, we assess the performance of the most commonly used asset pricing models in the literature.

Suggested Citation

  • Berk, Jonathan B. & van Binsbergen, Jules H., 2016. "Assessing asset pricing models using revealed preference," Journal of Financial Economics, Elsevier, vol. 119(1), pages 1-23.
    • Handle: RePEc:eee:jfinec:v:119:y:2016:i:1:p:1-23
    DOI: 10.1016/j.jfineco.2015.08.010
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    More about this item

    Keywords

    Asset Pricing Test; Factor Models; CAPM; Mutual Funds; Flows;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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