On Multivariate Tests of the CAPM
This paper evaluates the power of multivariate tests of the Capital Asset Pricing Model. The results indicate that when employing an unspecified alternative hypothesis, the ability of the tests to distinguish between the CAPM and other pricing models is poor. An upperbound is derived for the distance the alternative distribution of the test statistic can be from the null distribution when the deviations from the CAPM are due to missing factors. This upperbound explains the low power of the tests.
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