The CAPM Works Better for Average Daily Returns
27 Pages Posted: 21 Aug 2016 Last revised: 6 Sep 2018
Date Written: July 26, 2018
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 significantly priced for average daily returns. Confirming other studies, beta is not priced for realized monthly returns. Further analyses suggest that popular multi-factors are more significantly 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
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