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An Exact Bayes Test of Asset Pricing Models with Application to International Markets

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Author Info

  • Doron Avramov

    (University of Maryland)

  • John C. Chao

    (University of Maryland)

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    Abstract

    This paper develops and implements an exact finite-sample test of asset pricing models with time-varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing specifications, both nested and nonnested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international Capital Asset Pricing Model (ICAPM) and conditional ICAPM versions of Fama and French (1998). The empirical evidence suggests that the best performing model is the ICAPM with the value premium constructed based on global earnings-to-price ratio.

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    Bibliographic Info

    Article provided by University of Chicago Press in its journal Journal of Business.

    Volume (Year): 79 (2006)
    Issue (Month): 1 (January)
    Pages: 293-324

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    Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:293-324

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    Web page: http://www.journals.uchicago.edu/JB/

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    Cited by:
    1. Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
    2. Glabadanidis, Paskalis, 2009. "Measuring the economic significance of mean-variance spanning," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 596-616, May.

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