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Testing the capital asset pricing model efficiently under elliptical symmetry : a semiparametric approach

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  • Hodgson, Douglas J
  • Linton, Oliver
  • Vorkink, Keith

Abstract

We develop new tests of the capital asset pricing model which are valid under the assumption that the distribution generating returns is elliptically symmetric; this assumption is necessary and sufficient for the validity of the CAPM. Our test is based on semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function of a scalar transformation of the observed multivariate data. The elliptically symmetric family includes a number of thick-tailed distributions and so is potentially relevant in financial applications. Our estimated betas are lower than the OLS estimates, and our parameter estimates are much less consistent with the CAPM restrictions than the corresponding OLS estimates.

Suggested Citation

  • Hodgson, Douglas J & Linton, Oliver & Vorkink, Keith, 2000. "Testing the capital asset pricing model efficiently under elliptical symmetry : a semiparametric approach," LSE Research Online Documents on Economics 2197, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:2197
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    References listed on IDEAS

    as
    1. Hodgson, Douglas J., 1998. "Adaptive Estimation Of Error Correction Models," Econometric Theory, Cambridge University Press, vol. 14(01), pages 44-69, February.
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    Keywords

    Adaptive estimation; capital asset pricing model; efficiency.;

    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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