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The CAPM with Measurement Error: ‘There’s life in the old dog yet!’

Author

Listed:
  • Simmet Anastasia

    (Department of Economics, University of Konstanz, D-78457Konstanz, Germany)

  • Pohlmeier Winfried

    (Department of Economics, Box D124, University of Konstanz, D-78457Konstanz, Germany)

Abstract

This paper takes a closer look at the consequences of using a market index as a proxy for the latent market return in the capital asset pricing model. In particular, the consequences of two major sources of misspecification are analyzed: (i) the use of inaccurate weights and (ii) the use of only a subset of the asset universe to construct the index. The consequences resulting from the use of a badly chosen market proxy reach from inconsistent parameter estimates to misinterpretation of test outcomes indicating the existence of abnormal returns.

Suggested Citation

  • Simmet Anastasia & Pohlmeier Winfried, 2020. "The CAPM with Measurement Error: ‘There’s life in the old dog yet!’," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 240(4), pages 417-453, August.
    • Handle: RePEc:jns:jbstat:v:240:y:2020:i:4:p:417-453:n:3
    DOI: 10.1515/jbnst-2018-0089
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    More about this item

    Keywords

    CAPM; measurement error; Roll’s critique; minimum distance estimation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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