Assessing Asset Pricing Models Using Revealed Preference
Stanford Graduate School of Business; National Bureau of Economic Research (NBER)
Jules H. Van Binsbergen
University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)
August 22, 2014
We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the true risk model. Using this methodology, we find that of the models most commonly used in the literature, the Capital Asset Pricing Model is the closest. Given our current state of knowledge, we argue that the Capital Asset Pricing Model is the appropriate method to use to calculate the cost of capital of an investment opportunity. Despite the Capital Asset Pricing Model's success, we also document that a large fraction of mutual fund flows remain unexplained by existing asset pricing models.
Number of Pages in PDF File: 39
Keywords: Asset Pricing Models, Factor Models, Test, Mutual Fund Flowsworking papers series
Date posted: October 17, 2013 ; Last revised: August 23, 2014
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