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CAPM Reconsidered: A Robust Finite Sample Evaluation

  • Ravikumar, B.

    ()

    (University of Iowa)

  • Ray, Surajit

    ()

    (University of Iowa)

  • Savin, N.E.

    ()

    (University of Iowa)

In this paper, the conventional test of the Sharpe-Lintner version of the Capital Asset Pricing Model (CAPM) are reconsidered. The CAPM is formulated as a Seemingly Unrelated Regression (SUR) system with an adding-up restriction. A statistical framework for conducting the conventional tests is provided. A Wald statistic that takes into account the adding-up restriction and that is robust to heteroskedasticity and/or autocorrelation of unknown form is used to test the CAPM. The robust Wald test with asymptotic critical values rejects the CAPM for most subsamples. Monte Carlo simulations are then performed to obtain the finite sample critical values. Our empirical results show that the CAPM is consistent with the data when the tests are based on finite sample critical values.

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File URL: http://www.biz.uiowa.edu/faculty/ravikumar/capm.pdf
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Paper provided by University of Iowa, Department of Economics in its series Working Papers with number 99-04.

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Length: 32 pages
Date of creation: May 1999
Date of revision:
Handle: RePEc:uia:iowaec:99-04
Contact details of provider: Postal: University of Iowa, Department of Economics, Henry B. Tippie College of Business, Iowa City, Iowa 52242
Phone: (319) 335-0829
Fax: (319) 335-1956
Web page: http://tippie.uiowa.edu/economics/

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  1. Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
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  5. Jagannathan, Ravi & Wang, Zhenyu, 1996. " The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 51(1), pages 3-53, March.
  6. B. Ravikumar & Surajit Ray & N. Eugene Savin, 2000. "Robust Wald Tests in SUR Systems with Adding-up Restrictions," Econometrica, Econometric Society, vol. 68(3), pages 715-720, May.
  7. MacKinlay, A. Craig, 1987. "On multivariate tests of the CAPM," Journal of Financial Economics, Elsevier, vol. 18(2), pages 341-371, June.
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  10. Ferson, Wayne E. & Foerster, Stephen R., 1994. "Finite sample properties of the generalized method of moments in tests of conditional asset pricing models," Journal of Financial Economics, Elsevier, vol. 36(1), pages 29-55, August.
  11. Kandel, Shmuel & Stambaugh, Robert F, 1995. " Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 157-84, March.
  12. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
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