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The CAPM debate

  • Ravi Jagnnathan
  • Ellen R. McGrattan

This article describes the academic debate about the usefulness of the capital asset pricing model (the CAPM) developed by Sharpe and Lintner. First the article describes the data the model is meant to explain—the historical average returns for various types of assets over long time periods. Then the article develops a version of the CAPM and describes how it measures the risk of investing in particular assets. Finally the article describes the results of competing studies of the model's validity. Included are studies that support the CAPM (Black; Black, Jensen, and Scholes; Fama and MacBeth), studies that challenge it (Banz; Fama and French), and studies that challenge those challenges (Amihud, Christensen, and Mendelson; Black; Breen and Korajczyk; Jagannathan and Wang; Kothari, Shanken, and Sloan). The article concludes by suggesting that, while academic debate continues, the CAPM may still be useful for those interested in the long run.

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Article provided by Federal Reserve Bank of Minneapolis in its journal Quarterly Review.

Volume (Year): (1995)
Issue (Month): Fall ()
Pages: 2-17

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Handle: RePEc:fip:fedmqr:y:1995:i:fall:p:2-17:n:v.19no.4
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  1. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
  2. Ferson, Wayne E & Korajczyk, Robert A, 1995. "Do Arbitrage Pricing Models Explain the Predictability of Stock Returns?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 309-49, July.
  3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  4. Shanken, Jay, 1985. "Multivariate tests of the zero-beta CAPM," Journal of Financial Economics, Elsevier, vol. 14(3), pages 327-348, September.
  5. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
  6. V.V. Chari & Ravi Jagannathan & Aharon R. Ofer, 1987. "Seasonalities in security returns: the case of earnings announcements," Staff Report 110, Federal Reserve Bank of Minneapolis.
  7. Kothari, S P & Shanken, Jay & Sloan, Richard G, 1995. " Another Look at the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 185-224, March.
  8. MacKinlay, A Craig & Richardson, Matthew P, 1991. " Using Generalized Method of Moments to Test Mean-Variance Efficiency," Journal of Finance, American Finance Association, vol. 46(2), pages 511-27, June.
  9. Harvey, Campbell R., 1989. "Time-varying conditional covariances in tests of asset pricing models," Journal of Financial Economics, Elsevier, vol. 24(2), pages 289-317.
  10. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  11. Ravi Jagannathan & Zhenyu Wang, 1993. "The CAPM is alive and well," Staff Report 165, Federal Reserve Bank of Minneapolis.
  12. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
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