Empirical Tests of Asset Pricing Models with Individual Stocks
54 Pages Posted: 24 Jan 2014 Last revised: 22 Sep 2015
Date Written: March 15, 2013
We develop an instrumental variables methodology to obtain consistent estimates of risk premiums using individual stocks as test assets. Simulation evidence indicates that this methodology yields unbiased estimates of risk premiums and that the associated tests are well specified in small samples. We test a number of recently proposed asset pricing models using this approach. We find that the CAPM market risk, SMB and HML factors risks, investment and ROE factors risks under the production-based asset pricing model and the LCAPM illiquidity-adjusted market risk are not priced.
Keywords: Asset pricing models, Empirical tests, Test assets, Individual stocks, Instrumental variables
JEL Classification: G12, C10
Suggested Citation: Suggested Citation