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Assessing asset pricing models using revealed preference

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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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    References listed on IDEAS

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    Cited by:

    1. Marcel Müller & Tobias Rosenberger & Marliese Uhrig-Homburg, 2017. "Fake Alpha," SFB 649 Discussion Papers SFB649DP2017-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. repec:eee:jfinec:v:126:y:2017:i:3:p:592-613 is not listed on IDEAS
    3. Joseph Gerakos & Juhani T. Linnainmaa & Adair Morse, 2016. "Asset Managers: Institutional Performance and Smart Betas," NBER Working Papers 22982, National Bureau of Economic Research, Inc.
    4. Jeon, Hyunglae & Kang, Jangkoo & Lee, Changjun, 2017. "Precision about manager skill, mutual fund flows, and performance persistence," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 222-237.
    5. Jedrzej Bialkowski & Laura T. Starks, 2016. "SRI Funds: Investor Demand, Exogenous Shocks and ESG Profiles," Working Papers in Economics 16/11, University of Canterbury, Department of Economics and Finance.

    More about this item

    Keywords

    Asset Pricing Test; Factor Models; CAPM; Mutual Funds; Flows;

    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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