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Solving an Empirical Puzzle in the Capital Asset Pricing Model

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Listed:
  • Jalal D. Akhavein
  • John H. Leusner
  • P. A. V. B. Swamy

Abstract

A long standing puzzle in the Capital Asset Pricing Model (CAPM) has been the inability of empirical work to validate it. This paper presents a new approach to estimating the CAPM, taking into account the differences between observable and expected returns for risky assets and for the market portfolio of all traded assets, as well as inherent nonlinearities and the effects of excluded variables. Using this approach, we provide evidence that the relation between the observable returns on stock and market portfolios is nonlinear.

Suggested Citation

  • Jalal D. Akhavein & John H. Leusner & P. A. V. B. Swamy, "undated". "Solving an Empirical Puzzle in the Capital Asset Pricing Model," Finance and Economics Discussion Series 1996-14, Board of Governors of the Federal Reserve System (U.S.), revised 04 Dec 2019.
    • Handle: RePEc:fip:fedgfe:1996-14
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    File URL: http://www.federalreserve.gov/pubs/feds/1996/199614/199614pap.pdf
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    References listed on IDEAS

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    Cited by:

    1. Kwang Woo Park & Myeong Hwan Kim, 2009. "The industrial relationships in time-varying beta coefficients between Korea and United States," Applied Economics, Taylor & Francis Journals, vol. 41(15), pages 1929-1938.
    2. Sascha Mergner & Jan Bulla, 2008. "Time-varying beta risk of Pan-European industry portfolios: A comparison of alternative modeling techniques," The European Journal of Finance, Taylor & Francis Journals, vol. 14(8), pages 771-802.
    3. Hyunjoo Kim Karlsson & R. Scott Hacker, 2013. "Time-varying betas of sectoral returns to market returns and exchange rate movements," Applied Financial Economics, Taylor & Francis Journals, vol. 23(14), pages 1155-1168, July.
    4. López-Herrera, Francisco & Valencia-Herrera, Humberto, 2016. "Hacia un Modelo de Valuación de Activos de Capital para México: Análisis de Activos Individuales con Coeficientes Variantes en el Tiempo," Panorama Económico, Escuela Superior de Economía, Instituto Politécnico Nacional, vol. 0(22), pages 75-103, primer se.
    5. P. Swamy & Thomas Lutton & George Tavlas, 1997. "How should diversifiable and nondiversifiable portfolio risks be defined?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 21(3), pages 11-18, September.

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