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Market Proxies, Correlation, and Relative Mean-Variance Efficiency: Still Living with the Roll Critique

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  • Todd, Prono

Abstract

A test of the CAPM is developed conditional on a prior belief about the correlation between the true market return and the proxy return used in the test. Consideration is given to the effect of the proxy's mismeasurement of the market return on the estimation of the market model. Failure to grant this consideration biases tests towards rejection by overstating the inefficiency of the proxy. An extension of the proposed test to a CAPM with conditioning information links mismeasurement of the market return to time-variation in beta.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 20031.

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Date of creation: Sep 2009
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Handle: RePEc:pra:mprapa:20031

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Keywords: Asset pricing; CAPM; portfolio efficiency; multivariate testing; bootstrap hypothesis testing; triangular systems; endogeneity; identification; GMM; conditional heteroskedasticity; GARCH;

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Cited by:
  1. Todd, Prono, 2009. "GARCH-Based Identification and Estimation of Triangular Systems," MPRA Paper 20032, University Library of Munich, Germany.

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