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An empirical investigation of asset pricing models under divergent lending and borrowing rates

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  • Yacine Hammami

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Abstract

Asset pricing theory implies that the estimate of the zero-beta rate should fall between divergent lending and borrowing rates. This paper proposes a formal test of this restriction using the difference between the prime loan rate and the 1-month Treasury bill rate as a proxy for the difference between borrowing and lending rates. Based on simulations, this paper shows that in the ordinary least squares case, the Fama and MacBeth (J Pol Econ 81:607–636, 1973 ) t-statistic has high power against a general alternative, which is not true of the Shanken (Rev Financ Stud 5:1–33, 1992 ) and Kan et al. (J Financ doi: 10.1111/jofi.12035 , 2013 ) t-statistics. In the generalized least squares case, all three t-statistics have high power. The empirical investigation highlights that only the intertemporal capital asset pricing model reasonably prices the zero-beta portfolio. Other models, such as the Fama and French (J Financ Econ 33:3–56, 1993 ) model, do not assign the correct value to the zero-beta rate. Copyright Swiss Society for Financial Market Research 2014

Suggested Citation

  • Yacine Hammami, 2014. "An empirical investigation of asset pricing models under divergent lending and borrowing rates," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 28(3), pages 263-279, August.
  • Handle: RePEc:kap:fmktpm:v:28:y:2014:i:3:p:263-279 DOI: 10.1007/s11408-014-0233-1
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing models; Two-pass cross-sectional regressions; Zero-beta portfolio; Misspecification-robust t-ratio; C10; G10; G12;

    JEL classification:

    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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