Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5089610 | Journal of Banking & Finance | 2012 | 10 Pages |
Abstract
We show that in the presence of non-zero pricing errors, the Fama-MacBeth (FM) cross-sectional regression test is very likely to either reject the Capital Asset Pricing Model (CAPM) when it (almost) holds or accept the model when it grossly fails. We investigate the case when pricing errors are correlated with betas and demonstrate that the test performance depends crucially on the correlation, cross-sectional distribution of betas, and several other parameter values. Even when the CAPM holds exactly (pricing errors are zero) the FM test is equally likely to either reject or accept the model when typical sample sizes are used.
Keywords
Related Topics
Social Sciences and Humanities
Economics, Econometrics and Finance
Economics and Econometrics
Authors
Irina Murtazashvili, Nadia Vozlyublennaia,