Assessing Asset Pricing Models Using Revealed Preference

41 Pages Posted: 3 Sep 2014

See all articles by Jonathan Berk

Jonathan Berk

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Jules H. van Binsbergen

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: August 2014

Abstract

We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the model that investors use in making their capital allocation decisions. Using this methodology, we find that of the models most commonly used in the literature, the Capital Asset Pricing Model is the closest. The finding that investors’ revealed preferences are most aligned with the Capital Asset Pricing Model despite the fact that the model has been shown to perform poorly relative to other models in explaining cross sectional variation in expected returns, is an important puzzle for future research. We also document that a large fraction of mutual fund flows remain unexplained.

Suggested Citation

Berk, Jonathan B. and van Binsbergen, Jules H., Assessing Asset Pricing Models Using Revealed Preference (August 2014). NBER Working Paper No. w20435. Available at SSRN: https://ssrn.com/abstract=2490843

Jonathan B. Berk (Contact Author)

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
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National Bureau of Economic Research (NBER)

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Jules H. Van Binsbergen

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

HOME PAGE: http://www.nber.org/people/jules_vanbinsbergen

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