Keywords

capital asset pricing model, elliptically symmetric distributions, semiparametric estimation

Abstract

We develop new tests of the capital asset pricing model that take account of and are valid under the assumption that the distribution generating returns is elliptically symmetric; this assumption is necessary and sufficient for the validity of the CAPM. Our test is based on semiparametric efficient estimation procedures for a seemingly unrelated regression model where the multivariate error density is elliptically symmetric, but otherwise unrestricted. The elliptical symmetry assumption allows us to avoid the curse of dimensionality problem that typically arises in multivariate semiparametric estimation procedures, because the multivariate elliptically symmetric density function can be written as a function of a scalar transformation of the observed multivariate data. The elliptically symmetric family includes a number of thick-tailed distributions and so is potentially relevant in financial applications. Our estimated betas are lower than the OLS estimates, and our parameter estimates are much less consistent with the CAPM restrictions than the corresponding OLS estimates.

Original Publication Citation

“Testing the Capital Asset Pricing Model Efficiently Under Elliptical Symmetry: A Semiparametric Approach,” (with Douglas Hodgson and Oliver Linton), 2002, Journal of Applied Econometrics, 17, 617-639.

Document Type

Peer-Reviewed Article

Publication Date

2002

Publisher

Journal of Applied Econometrics

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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