A net beta test of asset pricing models

Freeman, Mark C.; Guermat, Cherif

Abstract

While many recent empirical studies of the CAPM have used conditional beta tests, this technique has recently been shown to have several weaknesses. Here we introduce a new, more robust, net beta test which shares a number of characteristics with conditional beta tests. The method is extended to the multi-factor case when there are mimicking portfolios of assets for the underlying factors, including the Fama-French three-factor model. We demonstrate theoretically, by simulation and using market data that the net beta estimators have lower standard errors than those generated by the standard Fama-MacBeth test. © 2009 Elsevier Inc. All rights reserved.

• Journal Article Type: Article
• Publication Date: Jan 1, 2010
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 19
• Issue: 1
• Pages: 1-9
• DOI: https://doi.org/10.1016/j.irfa.2009.09.008
• Keywords: CAPM, factor models, capital asset pricing, conditional beta tests
• Public URL: https://uwe-repository.worktribe.com/output/982236
• Publisher URL: http://dx.doi.org/10.1016/j.irfa.2009.09.008