testingCAPMrevisitedJEF2009

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Unformatted text preview: Electronic copy available at: http://ssrn.com/abstract=1517874 TESTING THE CAPM REVISITED Surajit Ray a* , N. E. Savin b and Ashish Tiwari c July 14, 2009 a Morgan Stanley, IM-Global Risk & Analysis, 522 5 th Avenue, New York, NY 10036* b Department of Economics, Tippie College of Business, University of Iowa, 108 John Pappajohn Bus. Bldg., Iowa City, IA 52242-1000 c Department of Finance, Tippie College of Business, University of Iowa, 108 John Pappajohn Bus. Bldg., Iowa City, IA 52242-1000 Please send correspondence to: Ashish Tiwari, Tippie College of Business, Department of Finance, 108 John Pappajohn Bus. Bldg., Iowa City, IA 52242-1000, USA. E-mail: ashish- tiwari@uiowa.edu Fax: (319) 335-3690. Tel: (319) 353-2185 * Morgan Stanley disclaimer: This information is for educational purposes only and does not contend to address the financial objectives, situation or specific needs of any individual investor. Of course, these views may change in response to changing circumstances and market conditions. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy. The forecasts and opinions in this piece are not necessarily those of Morgan Stanley Investment Management, and may not actually come to pass. Information in this report does not pertain to any Morgan Stanley Investment Management product and is not a solicitation for any product. Electronic copy available at: http://ssrn.com/abstract=1517874 Testing the CAPM Revisited Abstract This paper re-examines the tests of the Sharpe-Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during 1965-2004. The paper shows that the evidence for rejecting the CAPM on statistical grounds is weaker than the consensus view suggests, and highlights the pitfalls of testing multiple hypotheses with the conventional heteroskedasticity and autocorrelation robust (HAR) test with asymptotic P-values. The conventional test rejects the null for almost all sub-periods, which is consistent with the evidence in the literature. By contrast, the null is not rejected for most of the sub-periods by the new HAR tests developed by Keifer, Vogelsang and Bunzel (2000), Kiefer and Vogelsang (2005), and Sun, Phillips and Jin (2008). 1 Testing the CAPM Revisited 1. Introduction The Capital Asset Pricing Model (CAPM) of Sharpe (1964) and Lintner (1965) rightfully occupies a central place in the asset pricing literature. Not surprisingly, an enormous research effort has been devoted to the empirical testing of the model over the past several decades....
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This note was uploaded on 08/23/2010 for the course ECON 583 taught by Professor Zivot during the Fall '09 term at W. Alabama.

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testingCAPMrevisitedJEF2009 - Electronic copy available at:

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