Abstract

http://ssrn.com/abstract=2340784
 


 



Assessing Asset Pricing Models Using Revealed Preference


Jonathan Berk


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


Abstract:     
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 Flows

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Date posted: October 17, 2013 ; Last revised: August 23, 2014

Suggested Citation

Berk, Jonathan and van Binsbergen, Jules H., Assessing Asset Pricing Models Using Revealed Preference (August 22, 2014). Available at SSRN: http://ssrn.com/abstract=2340784 or http://dx.doi.org/10.2139/ssrn.2340784

Contact Information

Jonathan B. Berk
Stanford Graduate School of Business ( email )
518 Memorial Way
Stanford, CA 94305-5015
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jules H. Van Binsbergen (Contact Author)
University of Pennsylvania - The Wharton School ( email )
3641 Locust Walk
Philadelphia, PA 19104-6365
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen
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