Testing the capital asset pricing model efficiently under elliptical symmetry : a semiparametric approach

Hodgson, Douglas J, Linton, Oliver and Vorkink, Keith (2000) Testing the capital asset pricing model efficiently under elliptical symmetry : a semiparametric approach. Econometrics; EM/2000/398 (EM/00/398). Suntory and Toyota International Centres for Economics and Related Disciplines, London, UK.

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Abstract

We develop new tests of the capital asset pricing model which 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. 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.

Item Type:	Monograph (Discussion Paper)
Official URL:	http://sticerd.lse.ac.uk
Additional Information:	© 2000 the authors
Divisions:	Financial Markets Group Economics STICERD
Subjects:	H Social Sciences > HB Economic Theory
JEL classification:	C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C14 - Semiparametric and Nonparametric Methods C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods: General > C13 - Estimation C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C24 - Truncated and Censored Models C - Mathematical and Quantitative Methods > C2 - Econometric Methods: Single Equation Models; Single Variables > C22 - Time-Series Models
Date Deposited:	27 Apr 2007
Last Modified:	13 Sep 2024 19:42
URI:	http://eprints.lse.ac.uk/id/eprint/2197

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