Using Expectations to Test Asset Pricing Models
Alon P. Brav
Duke University - Fuqua School of Business
University of Michigan - Stephen M. Ross School of Business
Cornell University - Samuel Curtis Johnson Graduate School of Management; Interdisciplinary Center (IDC)
Financial Management, Vol. 34, No. 3, Autumn 2005
Asset pricing models generate predictions relating assets' expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts' expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts' expectations are unbiased estimates of market-wide expected rates of return, we can circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive, 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 do not find that high book-to-market firms are expected to earn higher returns than low book-to-market firms, inconsistent with the notion that book-to-market is a risk factor.
Number of Pages in PDF File: 34
JEL Classification: G12, G29, M41Accepted Paper Series
Date posted: August 22, 2005
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.375 seconds