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Testing the CAPM Revisited

35 Pages Posted: 23 Mar 2009 Last revised: 4 Oct 2009

Surajit D. Ray

Morgan Stanley

N. Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics

Ashish Tiwari

University of Iowa

Multiple version iconThere are 2 versions of this paper

Date Written: July 14, 2009

Abstract

This paper re-examines the tests of the Sharpe-Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during 1965-2004. The paper shows that the evidence for rejecting the CAPM on statistical grounds is weaker than the consensus view suggests, and highlights the pitfalls of testing multiple hypotheses with the conventional heteroskedasticity and autocorrelation robust (HAR) test with asymptotic P-values. The conventional test rejects the null for almost all sub-periods, which is consistent with the evidence in the literature. By contrast, the null is not rejected for most of the sub-periods by the new HAR tests developed by Keifer, Vogelsang and Bunzel (2000), Kiefer and Vogelsang (2005), and Sun, Phillips and Jin (2008).

Keywords: CAPM, Heteroskedasticity and autocorrelation robust (HAR) tests, Conventional Wald tests

JEL Classification: G12, C32

Suggested Citation

Ray, Surajit D. and Savin, N. Eugene and Tiwari, Ashish, Testing the CAPM Revisited (July 14, 2009). Available at SSRN: https://ssrn.com/abstract=1364800 or http://dx.doi.org/10.2139/ssrn.1364800

Surajit D. Ray

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

Nathan Eugene Savin

University of Iowa - Henry B. Tippie College of Business - Department of Economics ( email )

108 Pappajohn Building
Iowa City, IA 52242
United States
319-335-0855 (Phone)

Ashish Tiwari (Contact Author)

University of Iowa ( email )

Finance Department
Henry B. Tippie College of Business, 108 PBB
Iowa City, IA 52242
United States
(319) 353-2185 (Phone)
(319) 335-3690 (Fax)

HOME PAGE: http://www.biz.uiowa.edu/faculty/atiwari

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