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Using Expectations to Test Asset Pricing Models
Author(s) -
Brav Alon,
Lehavy Reuven,
Michaely Roni
Publication year - 2005
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2005.tb00109.x
Subject(s) - capital asset pricing model , rate of return , proxy (statistics) , economics , expected return , econometrics , holding period return , risk–return spectrum , financial economics , consumption based capital asset pricing model , actuarial science , investment performance , microeconomics , finance , return on investment , statistics , mathematics , portfolio , production (economics)
Asset pricing models generate predictions relating assets' expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts' expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts' expectations are unbiased estimates of market‐wide expected rates of return, we can circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive, robust relation between expected return and market beta and a negative relation between expected return and firm size, consistent with the notion that these are risk factors. We do not find that high book‐to‐market firms are expected to earn higher returns than low book‐to‐market firms, inconsistent with the notion that book‐to‐market is a risk factor.