Nonnested Procedures in Econometric Tests of Asset Pricing Theories

Abstract

In this paper nonnested tests are used to contrast the performance ofthe capital asset pricing (CAPM) and consumption capital assetpricing (CCAPM) theories in describing the United States stock market. The procedures employed include the N-test, the NT-test, the W-test, the J-test,and the Encompassing test. The tests are carried out using data on firms as well as portfolios based on beta, capitalization, and SIC. The findings indicated that while during the 1973-1982 period the CAPM dominates the CCAPM, the results for the 1978-1987 period are mixed and in the 1983-1992 sample period the CCAPM is favored over the CAPM. The finding in favor of the CCAPM in the 1983-1992 period conflicts with much of the existing literature, which favors the CAPM.

JEL Classification: G12