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An Exact Bayes Test of Asset Pricing Models with Application to International Markets

Author

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  • Doron Avramov

    (University of Maryland)

  • John C. Chao

    (University of Maryland)

Abstract

This paper develops and implements an exact finite-sample test of asset pricing models with time-varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing specifications, both nested and nonnested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international Capital Asset Pricing Model (ICAPM) and conditional ICAPM versions of Fama and French (1998). The empirical evidence suggests that the best performing model is the ICAPM with the value premium constructed based on global earnings-to-price ratio.

Suggested Citation

  • Doron Avramov & John C. Chao, 2006. "An Exact Bayes Test of Asset Pricing Models with Application to International Markets," The Journal of Business, University of Chicago Press, vol. 79(1), pages 293-324, January.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:1:p:293-324
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    File URL: http://dx.doi.org/10.1086/497412
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    Cited by:

    1. Glabadanidis, Paskalis, 2009. "Measuring the economic significance of mean-variance spanning," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 596-616, May.
    2. Henkel, Sam James & Martin, J. Spencer & Nardari, Federico, 2011. "Time-varying short-horizon predictability," Journal of Financial Economics, Elsevier, vol. 99(3), pages 560-580, March.
    3. repec:oup:rfinst:v:30:y:2017:i:4:p:1316-1338. is not listed on IDEAS
    4. Francisco Barillas & Jay Shanken, 2017. "Which Alpha?," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1316-1338.
    5. Francisco Barillas & Jay Shanken, 2015. "Comparing Asset Pricing Models," NBER Working Papers 21771, National Bureau of Economic Research, Inc.
    6. Malefaki, Valia, 2015. "On Flexible Linear Factor Stochastic Volatility Models," MPRA Paper 62216, University Library of Munich, Germany.

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