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The stable long-run CAPM and the cross-section of expected returns

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Author Info
Kim, Jeong-Ryeol
Abstract

The capital-asset-pricing model (CAPM) is one of the most popular methods of financial market analysis. But, evidence of the poor empirical performance of the CAPM has accumulated in the literature. For example, based on their empirical results regarding the relation between market Beta and average return, Fama and French (1996) conclude that the CAPM is no longer a useful tool for empirical financial market analysis. Most empirical studies of the conventional CAPM take, however, neither the fat-tails of return data nor the price relationship between an asset of interest and the bench market portfolio into account. In the framework of a univariate Beta-model we consider a stable long-run CAPM taking account of the fat-tails of stock returns and the common stochastic trends between stock prices. Using the same data used by Fama and French (1996), the stable long-run CAPM demonstrates that Markowitz rule of the expected returns and variance of returns can (still) ?without any use of firm specific variables? explain the variation of the cross-sectional average returns.

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Publisher Info
Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2002,05.

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Date of creation: 2002
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Handle: RePEc:zbw:bubdp1:4170

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Related research
Keywords: CAPM; Stable Paretian distribution; Sto chastic common trend;

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Upper, Christian & Werner, Thomas, 2002. "Time Variation in the Tail Behaviour of Bund Futures Returns," Discussion Paper Series 1: Economic Studies 2002,25, Deutsche Bundesbank, Research Centre. [Downloadable!]
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