Choice of Expected Return Proxy and Asset Pricing Model Tests: Should It Matter?

63 Pages Posted: 6 Feb 2017

See all articles by Fatima Khushnud

Fatima Khushnud

The University of Western Australia - UWA Business School

Richard A. Heaney

University of Western Australia

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Date Written: February 6, 2017

Abstract

Are recent asset pricing tests informative as they seem? The critiques of Roll and, more recently, of Berk are well known, though they have not been raised much in the asset pricing literature over the last 15 years. We explore this question using two sources of expected returns, realised returns and IBES target price based analyst target return, within a Fama and French (1993) time series framework. We find (1) results are sensitive to expected return proxy choice. In particular, tests are sensitive to the way that proxies for market portfolio, size and value are constructed and (2) intercept estimates suggest that some of the more important asset pricing models do not fit the annual data used in this study particularly well. The sample includes US firms over a 10-year period from 2002 to 2012.

Keywords: asset pricing, IBES analyst target price, realized returns, expected annual returns

JEL Classification: G12

Suggested Citation

Khushnud, Fatima and Heaney, Richard A. and Treepongkaruna, Sirimon, Choice of Expected Return Proxy and Asset Pricing Model Tests: Should It Matter? (February 6, 2017). Available at SSRN: https://ssrn.com/abstract=2912028 or http://dx.doi.org/10.2139/ssrn.2912028

Fatima Khushnud

The University of Western Australia - UWA Business School ( email )

Crawley, Western Australia 6009
Australia

Richard A. Heaney

University of Western Australia ( email )

Crawley
Perth, Western Australia 6009
Australia
0414700799 (Phone)

Sirimon Treepongkaruna (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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