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A new test on the conditional capital asset pricing model

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Abstract

Testing the validity of the conditional capital asset pricing model (CAPM) is a puzzle in the finance literature. Lewellen and Nagel[14] find that the variation in betas and in the equity premium would have to be implausibly large to explain important asset-pricing anomalies. Unfortunately, they do not provide a rigorous test statistic. Based on a simulation study, the method proposed in Lewellen and Nagel[14] tends to reject the null too frequently. We develop a new test procedure and derive its limiting distribution under the null hypothesis. Also, we provide a Bootstrap approach to the testing procedure to gain a good finite sample performance. Both simulations and empirical studies show that our test is necessary for making correct inferences with the conditional CAPM.

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Authors and Affiliations

  1. Wang Yanan Institute for Studies in Economics, The MOE Key Lab of Econometrics and Fujian Key Lab of Statistical Sciences, Xiamen University, Xiamen, Fujian, 361005, China

    Xia-fei Li, Zong-wu Cai & Yu Ren

  2. Department of Economics, University of Kansas, 66045, Lawrence, KS, USA

    Zong-wu Cai

Authors
  1. Xia-fei Li
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  2. Zong-wu Cai
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  3. Yu Ren
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Corresponding author

Correspondence to Yu Ren.

Additional information

Cai’s research was supported, in part, by the National Nature Science Foundation of China (71131008(Key Project), 70871003, 70971113). Ren’s research was supported by the Fundamental Research Funds for the Central Universities (2013221022), the Natural Science Foundation of Fujian Province (2011J01384) and the Natural Science Foundation of China (71301135, 71203189, 71131008).

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Li, Xf., Cai, Zw. & Ren, Y. A new test on the conditional capital asset pricing model. Appl. Math. J. Chin. Univ. 30, 163–186 (2015). https://doi.org/10.1007/s11766-015-3351-2

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  • DOI: https://doi.org/10.1007/s11766-015-3351-2

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