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A LIKELIHOOD RATIO TEST OF THE ZERO‐BETA CAPM IN AUSTRALIAN EQUITY RETURNS
Author(s) -
Faff Robert W.
Publication year - 1991
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/j.1467-629x.1991.tb00166.x
Subject(s) - capital asset pricing model , beta (programming language) , econometrics , likelihood ratio test , equity (law) , statistic , economics , index (typography) , multivariate statistics , statistics , zero (linguistics) , mathematics , financial economics , linguistics , philosophy , world wide web , computer science , political science , law , programming language
This paper tests the zero‐beta CAPM with Australian equity returns, using the multivariate approach developed by Gibbons (1982). For the period 1958 to 1987, based on its asymptotic distribution, the likelihood ratio test (LRT) statistic indicates a strong rejection of the model when an equally weighted market index is used. However, small sample adjustments to the test suggested by Jobson and Korkie (1982) and by Shanken (1985) place the validity of this conclusion in some doubt. When a value weighted market index is used for the period 1974 to 1987, the tests reveal at least moderate support for the zero‐beta CAPM.