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A Note on the Interdependent Structure of Security Returns

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  • Lee, Cheng F.

Abstract

S-L have derived a simultaneous equation CAPM to offer a robust test for the interdependent assumption of the single equation CAPM. However, their empirical results are subject to the multicollinearity problem associated with 2SLS. For improving their results, several alternative estimation methods are used to estimate a seven-equation system for the oil industry. In accordance with both the multicollinearity criterion and residual analysis, it is found the modified 2SLS is the most appropriate method to be used to estimate the S-L model. From the results obtained from the modified 2SLS, it is shown that the market rate of return still is a relatively important factor in predicting the movement of capital market in the simultaneous equation CAPM.After applying a better estimation method to the S-L simultaneous equation CAPM, it is shown that the S-L model has given us the interesting interrelationship of capital asset pricing within a particular risk class.

Suggested Citation

  • Lee, Cheng F., 1976. "A Note on the Interdependent Structure of Security Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 11(1), pages 73-86, March.
    • Handle: RePEc:cup:jfinqa:v:11:y:1976:i:01:p:73-86_02
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    Cited by:

    1. Cheng-Few Lee & Woan-lih Liang & Fu-Lai Lin & Yating Yang, 2016. "Applications of simultaneous equations in finance research: methods and empirical results," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 943-971, November.
    2. Cheng Few Lee, 2020. "Financial econometrics, mathematics, statistics, and financial technology: an overall view," Review of Quantitative Finance and Accounting, Springer, vol. 54(4), pages 1529-1578, May.

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