The CAPM Works Better for Average Daily Returns

27 Pages Posted: 21 Aug 2016 Last revised: 6 Sep 2018

See all articles by Wei Liu

Wei Liu

Texas A&M University - Department of Finance

James W. Kolari

Texas A&M University - Department of Finance

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics

Date Written: July 26, 2018

Abstract

This paper provides cross-sectional tests of the Capital Asset Pricing Model (CAPM). To mitigate problems with noise in realized stock return series, we use a smoothed data series of average daily returns per month. Tests using U.S. stock returns for equal-weighted portfolios indicate that beta is signi ficantly priced for average daily returns. Confi rming other studies, beta is not priced for realized monthly returns. Further analyses suggest that popular multi-factors are more signi ficantly priced for average daily returns also. We conclude that CAPM beta is better supported by average daily returns than realized returns.

Keywords: CAPM, cross-sectional tests, expected returns, realized returns

JEL Classification: G12

Suggested Citation

Liu, Wei and Kolari, James W. and Pynnonen, Seppo, The CAPM Works Better for Average Daily Returns (July 26, 2018). Mays Business School Research Paper No. 2826683. Available at SSRN: https://ssrn.com/abstract=2826683 or http://dx.doi.org/10.2139/ssrn.2826683

Wei Liu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Seppo Pynnonen

University of Vaasa, Department of Mathematics and Statistics ( email )

Wolffintie 34
65200 Vaasa
Finland
+358-21-449 8311 (Phone)

HOME PAGE: http://www.uva.fi/~sjp/

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