Using Expectations to Test Asset Pricing Models
Duke University - Fuqua School of Business
The Stephen M. Ross School of Business at the University of Michigan
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
13th Annual Utah Winter Finance Conference
This paper uses ex-ante measures of expected return and provides evidence on the relation between expected returns and the pricing of assets in financial markets. An investigation into the relation between expected returns and assets' characteristics is a way to test asset pricing models without the assumption that realized return is an unbiased proxy for ex-ante expected asset returns. We find a positive and robust relation between expected return and market beta and a negative relation between expected return and firm size, consistent with the notion that these are risk factors. We find that high book-to-market firms are not expected to earn higher returns than low book-to-market firms, inconsistent with the notion that book-to-market is a risk factor.
Note: Formally titled "Expected Return and Asset Pricing"
Number of Pages in PDF File: 46
JEL Classification: G12working papers series
Date posted: January 9, 2003
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