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Stochastic Unit Roots in the Capital Asset Pricing Model?
Author(s) -
Yoon Gawon
Publication year - 2005
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/j.0307-3378.2005.00228.x
Subject(s) - economics , capital asset pricing model , proxy (statistics) , unit root , econometrics , consumption based capital asset pricing model , interest rate , risk free interest rate , financial economics , monetary economics , mathematics , statistics
Evidence is provided in this article for the existence of a stochastic unit root (STUR) in a proxy for the US risk‐free interest rate, in preference to a standard fixed unit root. The implications of the existence of the STUR, on estimating and testing the capital asset pricing model, are also examined through simulations. The effects of the STUR in the risk‐free interest rate, on conducting unit root tests for excess market returns and estimating the betas of assets, are found to be qualitatively similar to those of the standard (fixed) unit root. Thus, this article confirms the conjecture of Markellos and Mills (2001, Applied Economics Letters , 8, pp. 499–502) on the risk‐free interest rate following near‐integrated processes, at least for a STUR.