Nonnested Procedures in Econometric Tests of Asset Pricing Theories
The Journal of Financial Research • Vol. XXIII, No. 1 • Pages 103-128 • Spring 2000
26 Pages Posted: 17 Jun 2014 Last revised: 30 Dec 2016
Date Written: 2000
In this paper nonnested tests are used to contrast the performance of the capital asset pricing (CAPM) and consumption capital asset pricing (CCAPM) theories in describing the U.S. 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 Standard Industrial Classification codes. The findings indicate that although during 1973-82 the CAPM dominates the CCAPM, during 1978-87 the results are mixed, and during 1983-92 the CCAPM dominates. The finding in favor of the CCAPM in 1983-92 conflicts with much of the existing literature, which favors the CAPM.
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