Abstract
Asset pricing theory implies that the estimate of the zero-beta rate should fall between divergent lending and borrowing rates. This paper proposes a formal test of this restriction using the difference between the prime loan rate and the 1-month Treasury bill rate as a proxy for the difference between borrowing and lending rates. Based on simulations, this paper shows that in the ordinary least squares case, the Fama and MacBeth (J Pol Econ 81:607–636, 1973) t-statistic has high power against a general alternative, which is not true of the Shanken (Rev Financ Stud 5:1–33, 1992) and Kan et al. (J Financ doi:https://doi.org/10.1111/jofi.12035, 2013) t-statistics. In the generalized least squares case, all three t-statistics have high power. The empirical investigation highlights that only the intertemporal capital asset pricing model reasonably prices the zero-beta portfolio. Other models, such as the Fama and French (J Financ Econ 33:3–56, 1993) model, do not assign the correct value to the zero-beta rate.
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Notes
For a detailed review, see Goyal (2012).
The data on bond yields are from the U.S. Federal Reserve Board of Governors, identifier H15.
See Table 2.6 Personal Income and Its Disposition, Monthly.
Table 2.8.5 Personal Consumption Expenditures by Major Type of Product, Monthly.
The data on the dividend yield are from Robert Shiller’s website: https://doi.org/www.econ.yale.edu/~shiller/data.htm.
We investigated the empirical power using the type of simulation conducted by Shanken and Zhou (2007), but the differences between the Fama–MacBeth, the Shanken, and the Kan–Robotti–Shanken t-statistics are too small to warrant what is actually seen in empirical tests.
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We thank the anonymous referee for detailed comments and suggestions that were very helpful in improving the paper.
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Hammami, Y. An empirical investigation of asset pricing models under divergent lending and borrowing rates. Financ Mark Portf Manag 28, 263–279 (2014). https://doi.org/10.1007/s11408-014-0233-1
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DOI: https://doi.org/10.1007/s11408-014-0233-1
Keywords
- Asset pricing models
- Two-pass cross-sectional regressions
- Zero-beta portfolio
- Misspecification-robust t-ratio