Solving an Empirical Puzzle in the Capital Asset Pricing Model

Posted: 13 Jun 1998

See all articles by John Leusner

John Leusner

University of Chicago

Jalal D. Akhavein

Fitch Ratings Inc.

P.A.V.B. Swamy

Bureau of Labor Statistics

Date Written: April 15, 1996

Abstract

A long standing puzzle in the Capital Asset Pricing Model (CAPM) has been the inability of empirical work to validate it. This paper presents a new approach to estimating the CAPM, taking into account the differences between observable and expected returns for risky assets and for the market portfolio of all traded assets, as well as inherent nonlinearities and the effects of excluded variables. Using this approach, we provide evidence that the relation between the observable returns on stock and market portfolios is nonlinear.

JEL Classification: G1, C8

Suggested Citation

Leusner, John and Akhavein, Jalal D. and Swamy, Paravastu A.V.B., Solving an Empirical Puzzle in the Capital Asset Pricing Model (April 15, 1996). Available at SSRN: https://ssrn.com/abstract=7532

John Leusner

University of Chicago

1101 East 58th Street
Chicago, IL 60637
United States

Jalal D. Akhavein

Fitch Ratings Inc. ( email )

One State Street Plaza
New York, NY 10004
United States

Paravastu A.V.B. Swamy (Contact Author)

Bureau of Labor Statistics

2 Massachusetts Avenue, NE
Washington, DC 20212
United States

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