Solving an Empirical Puzzle in the Capital Asset Pricing Model | Zendy

John H. Leusner | Zendy; Jalal D. Akhavein | Zendy; P. A. V. B. Swamy | Zendy

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Solving an Empirical Puzzle in the Capital Asset Pricing Model

Author(s) -

John H. Leusner,

Jalal D. Akhavein,

P. A. V. B. Swamy

Publication year - 1996

Publication title -

finance and economics discussion series

Language(s) - English

Resource type - Journals

eISSN - 2767-3898

pISSN - 1936-2854

DOI - 10.17016/feds.1996.14

Subject(s) - capital asset pricing model , portfolio , arbitrage pricing theory , consumption based capital asset pricing model , economics , market portfolio , econometrics , financial economics , stock market , capital asset , stock (firearms) , asset (computer security) , finance , computer science , paleontology , horse , engineering , biology , computer security , mechanical engineering

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.

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