CAPM Reconsidered: A Robust Finite Sample Evaluation
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.
|Date of creation:||May 1999|
|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/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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 157-184, March.
- Shmuel Kandel & Robert F. Stambaugh, 1994. "Portfolio Inefficiency and the Cross-Section of Expected Returns," NBER Working Papers 4702, National Bureau of Economic Research, Inc.
- MacKinlay, A. Craig, 1987. "On multivariate tests of the CAPM," Journal of Financial Economics, Elsevier, vol. 18(2), pages 341-371, June.
- Newey, Whitney & West, Kenneth, 2014.
"A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix,"
Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-708, May.
- 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.
- 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.
- Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
- Ravi Jagannathan & Ellen R. McGrattan, 1995. "The CAPM debate," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 2-17.
- Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
- Bera, Anil K & Higgins, Matthew L, 1997. "ARCH and Bilinearity as Competing Models for Nonlinear Dependence," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(1), pages 43-50, January.
- Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
- Ravi Jagannathan & Zhenyu Wang, 1996.
"The conditional CAPM and the cross-section of expected returns,"
208, Federal Reserve Bank of Minneapolis.
- 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.
- Affleck-Graves, John & McDonald, Bill, 1989. " Nonnormalities and Tests of Asset Pricing Theories," Journal of Finance, American Finance Association, vol. 44(4), pages 889-908, September.
- Barten, A. P., 1969. "Maximum likelihood estimation of a complete system of demand equations," European Economic Review, Elsevier, vol. 1(1), pages 7-73.
- 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.
- Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
When requesting a correction, please mention this item's handle: RePEc:uia:iowaec:99-04. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (John Solow)
If references are entirely missing, you can add them using this form.