Todd, Prono (2009): Market Proxies, Correlation, and Relative Mean-Variance Efficiency: Still Living with the Roll Critique.
Download (224Kb) | Preview
A test of the CAPM is developed conditional on a prior belief about the correlation between the true market return and the proxy return used in the test. Consideration is given to the effect of the proxy's mismeasurement of the market return on the estimation of the market model. Failure to grant this consideration biases tests towards rejection by overstating the inefficiency of the proxy. An extension of the proposed test to a CAPM with conditioning information links mismeasurement of the market return to time-variation in beta.
|Item Type:||MPRA Paper|
|Original Title:||Market Proxies, Correlation, and Relative Mean-Variance Efficiency: Still Living with the Roll Critique|
|Keywords:||Asset pricing, CAPM, portfolio efficiency, multivariate testing, bootstrap hypothesis testing, triangular systems, endogeneity, identification, GMM, conditional heteroskedasticity, GARCH|
|Subjects:||C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models; Multiple Variables > C32 - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
|Depositing User:||Todd Prono|
|Date Deposited:||15. Jan 2010 15:38|
|Last Modified:||16. Feb 2013 06:32|
Adrian, T. and F. Franzoni (2004), "Learning about Beta: Time-Varying Factor Loadings, Expected Returns, and the Conditional CAPM," Federal Reserve Bank of New York Staff Reports, no. 193.
Ang, A. and J. Chen (2007), "CAPM over the Long Run: 1926-2001," Journal of Empirical Finance, 14, 1-40.
Bodurtha, J.N. and N.C. Mark (1991), "Testing the CAPM with Time-Varying Risks and Returns," Journal of Finance, 46, 1485-1505.
Bollerslev, T. (1986), "Generalized Autoregressive Conditional Heteroskedasticity," Journal of Econometrics, 31, 307-327.
Bollerslev, T. (1990), "Modelling the Coherence in Short Run Nominal Exchange Rates: a Multivariate Generalized ARCH Model," Review of Economics and Statistics, 72, 498-505.
Bollerslev, T., R.F Engle and J.M. Wooldridge (1998), "A Capital Asset Pricing Model with Time-Varying Covariances," Journal of the Political Economy, 96, 116-131.
Campbell, J.Y. (1996), "Understanding Risk and Return," Journal of Political Economy, 104, 298-345.
Campbell, J.Y. and T. Vuolteenaho (2004), "Bad Beta, Good Beta," American Economic Review, 94, 1249-1275.
Chou, P.-H. (1996), "Using Bootstrap to Test Mean-Variance Efficiency of a Given Portfolio," unpublished manuscript.
Diacogiannis, D. and D. Feldman (2006), "The CAPM for Inefficient Portfolios," unpublished manuscript.
Diebold, F., J. Im and J. Lee (1989), "A Note on Conditional Heteroskedasticity in the Market Model," Journal of Accounting, Auditing, and Finance, 8, 141-150.
Dittmar, R.F. (2002), "Nonlinear Pricing Kernels, Kurtosis Preferences, and Evidence from the Cross Section of Equity Returns," Journal of Finance, 57, 369-403.
Drost, F.C. and T.E. Nijman (1993), "Temporal Aggregation of GARCH Processes," Econometrica, 61, 909-927.
Engle, R.F. (1982), "Autoregressive Conditional Heteroskedasticity with estimates of the Variance of UK Inflation," Econometrica, 50, 987-1008.
Engle, R.F and K.F. Kroner (1995), "Multivariate Simultaneous Generalized GARCH," Econometric Theory, 11, 121-150.
Fama, E.F. (1965), "The Behavior of Stock Market Prices," Journal of Business, 38, 34-105.
Fama, E.F. and K.R. French (1989), "Business Conditions and Expected Returns on Stocks and Bonds," Journal of Financial Economics, 25, 23-49.
Fama, E.F. and K.R. French (1992), "Common Risk Factors in the Returns on Stocks and Bonds," Journal of Financial Economics, 33, 3-56.
Ferson, W.E. (1990), "Are the Latent Variables in Time-Varying Expected Returns Compensation for Consumption Risk?" Journal of Finance, 45, 397-429.
Gibbons, M.R., S.A. Ross and J. Shanken (1989), "A Test of the Efficiency of a Given Portfolio," Econometrica, 57, 1121-1152.
Hafner, C.M. (2003), "Fourth moment structure of multivariate GARCH models," Journal of Financial Econometrics, 1, 26-54.
Hall, P. and J.L Horowitz (1996), "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, 64, 891-916.
Hansen, L. (1982), "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, 50, 1029--1054.
Hansen, L. and R. Jagannathan (1997), "Assessing Specification Errors in Stochastic Discount Factor Models," Econometrica, 55, 587-614.
Harvey, C.R. (1989), "Time-Varying Conditional Covariances in Tests of Asset Pricing Models," Journal of Financial Economics, 24, 289-317.
Iglesias, E.M and G.D.A. Phillips (2004), "Simultaneous Equations and Weak Instruments under Conditionally Heteroskedastic Disturbances," unpublished manuscript.
Jagannathan, R. and Z. Wang (1996), "The Conditional CAPM and the Cross-Section of Expected Returns," Journal of Finance, 51, 3-53.
Kandel, S. and R.F. Stambaugh (1987), "On Correlations and Inferences About Mean-Variance Efficiency," Journal of Financial Economics, 18, 61-90.
Kandel, S. and R.F. Stambaugh (1995), "Portfolio Inefficiency and the Cross-Section of Expected Returns," Journal of Finance, 50, 157-184.
Keim, D. and R.F. Stambaugh (1986), "Predicting Returns in Stock and Bond Markets," Journal of Financial Economics, 17, 357-390.
Lettau, M. and S. Ludvigson (2001), "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, 109, 1238-1287.
Lewellen, J. and S. Nagel (2006), "The Conditional CAPM Does Not Explain Asset-Pricing Anomalies," Journal of Financial Economics, 82, 289-314.
Lintner, J. (1965), "The Valuation of Risky Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets," Review of Economics and Statistics, 47, 13-37.
MacKinlay, A.C., and M.P. Richardson (1991), "Using Generalized Method of Moments to Test Mean-Variance Efficiency," The Journal of Finance, 46, 511-527.
MacKinnon, J. (2007), "Bootstrap Hypothesis Testing," Queen's Economics Department Working Paper, no. 1127.
Mandelbrot, B. (1963), "The Variation of Certain Speculative Prices," Journal of Business, 36, 394-419.
Milhoj, A. (1985), "The Moment Structure of ARCH Processes," Scandinavian Journal of Statistics, 12, 281-292.
Newey, W.K. and D. McFadden (1994), "Large Sample Estimation and Hypothesis Testing," in Handbook of Econometrics, Vol. 4, ed. by R. Engle and D. McFadden, North Holland: Amsterdam, 2113-2247.
Prono, T. (2008), "GARCH-Based Identification and Estimation of Triangular Systems," Federal Reserve Bank of Boston QAU Working Paper, no. 08-04.
Rich, R.W., J. Raymond and J.S. Butler (1991), "Generalized Instrumental Variables Estimation of Autoregressive Conditional Heteroskedastic Models," Economic Letters, 35, 179-185.
Rigobon, R. (2002), "The Curse of Non-Investment Grade Countries," Journal of Development Economics, 69, 423-449.
Roll, R. (1977), "A Critique of the Asset Pricing Theory's Tests," Journal of Financial Economics, 4, 129-176.
Shanken, J. (1987), "Multivariate Proxies and Asset Pricing Relations: Living with the Roll Critique," Journal of Financial Economics, 18, 91-110.
Sharpe, W.F. (1964), "Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk," Journal of Finance, 19, 425-442.
Zhou, G. (1993), "Asset Pricing Tests under Alternative Distributions," Journal of Finance, 48, 1925-1942.