E assets should be close to the sml the capm fails

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Unformatted text preview: APM explain stock returns? • Unfortunately not. Finance would be so much easier and cleaner if it did. • Let’s say we take a bunch of assets and compute their α’s and β ’s. The CAPM makes two predictions: — High β assets should have high returns on average. — α’s or pricing errors should be low, i.e., assets should be close to the SML. • The CAPM fails quite miserably in terms of both predictions. • Given this empirical failure, what can we say? Table Ya lntrrceprs from excess stuck return regressions for 25 stuck purtfulios formed on size and book-to-market 342 months.” Book-to-market equity (HE/ME) t, Low 2 0.71 0.77 0.60 0.4’) 0.25 0.15 0.17 0.1s - 0.14 - 0.07 0.30 0.36 0.23 0.12 - 0.07 4 3 0.62 0.63 0.58 0.27 0.30 Uig K(r) - W’(r) 0.80 0.75 0.73 0.69 0.50 (ii) sm;III 2 3 4 - 0.22 0. IX 0. I6 0.05 Big - 0.04 IYYI, I(4 (i) 0.31 0.35 0.34 0.4 1 0.34 Small 2 3 4 1963 IO December quintiles Size quinlile equity: July High Low 2 3 4 High ~~ = (I + OI~‘ERM(I) + dDEF(f) + t$r) 0.92 0.93 0.89 0.96 0.53 1.73 I.91 I .9Y 1.01 1.27 2.20 2.60 2.28 1.96 1.17 2.61 2.85 3.01 2.X8 2.36 2.87 3.03 3.1 I 3.35 2.14 0.73 I .05 1.25 - 1.50 - 0.95 1.54 2.35 1.n2 1.20 - 0.70 2.19 2.7Y 3.20 2.91 1.8...
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This document was uploaded on 02/27/2014 for the course ECON 1745 at Harvard.

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