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Robust Estimation and Forecasting of the Capital Asset Pricing Model

In this paper, we develop a modified maximum likelihood (MML) estimator for the multiple linear regression model with underlying student t distribution. We obtain the closed form of the estimators, derive the asymptotic properties, and demonstrate that the MML estimator is more appropriate for estimating the parameters of the Capital Asset Pricing Model by comparing its performance with least squares estimators (LSE) on the monthly returns of US portfolios. The empirical results reveal that the MML estimators are more efficient than LSE in terms of the relative efficiency of one-step-ahead forecast mean square error in small samples.

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File URL: http://www.econ.canterbury.ac.nz/RePEc/cbt/econwp/1066.pdf
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Paper provided by University of Canterbury, Department of Economics and Finance in its series Working Papers in Economics with number 10/66.

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Length: 25 pages
Date of creation: 01 Oct 2010
Date of revision:
Handle: RePEc:cbt:econwp:10/66
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