Prices for all assets are assumed to move such that

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Unformatted text preview: e CAPM was: Market clearing. Prices for all assets are assumed to move such that an exogenous quantity of each asset equals the aggregate demand for the asset (in particular that “borrowing equals lending” in equilibrium) RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/10/2012. © P. KOLM. 13 Testing CAPM We can test CAPM using the time-series regression rit - rft = ai + bi (rMt - rft ) + eit [For you: What data would you use? What would you use for the risk free rate? What econometric test would you use? And, what issues may you encounter when doing the test? Read more about testing CAPM in I.6.4 in Alexander (2008) Describe how you would extend CAPM and how a multi-factor model works (see Chapter 8 in Fabozzi, Focardi et al. (2006)). What is APT, and what does it say? RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/10/2012. © P. KOLM. 14 References Carol Alexander (2008). Market Risk Analysis: Quantitative Methods in Finance, Wiley Frank J. Fabozzi, Sergio M. Focardi and Petter N. Kolm (2006). Financial Modeling of the Equity Market: From Capm to Cointegration. Hoboken, New Jersey, John Wiley & Sons, Inc. Endnotes We say that wM is a market portfolio, if for all i we have wM ,i = 1 Vi V0 , where Vi is the market value of asset i and V0 = åVi . i RISK AND PORTFOLIO MANAGEMENT WITH ECONOMETRICS, VER. 11/10/2012. © P. KOLM. 15...
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