NDLI: Some Tests of the Risk-Return Relationship Using Alternative Asset Pricing Models and Observed Expected Returns

Content Provider	Springer Nature Link
Author	Rahman, Shafiqur Coggin, T. Daniel Lee, Cheng Few
Copyright Year	1998
Abstract	This study examines the performance of three asset pricing models: the CAPM, the APT and the UAPT using observed expected returns from a three-phase dividend discount model with Value Line analyst estimates of future company-level earnings, dividends and growth rates. Our study is the first we know of to test the three major asset pricing models using observed expected returns. Our results are similar to prior research using ex post (realized) returns in that we find that the UAPT using macroeconomic factors is the best performing model, followed by the APT and the CAPM. However, our results also suggest that the importance of macroeconomic factors is much greater to expected returns than to realized returns, and the corresponding R2 values for models using expected returns are much higher than for models using realized returns. Combining our results for the UAPT with those of Marston and Harris (1993) for the CAPM suggests that these models are more successful in tests using observed expected returns than in tests using realized returns as proxies for expected returns. Unit root tests suggest that monthly observed expected returns follow the classic “random walk without drift” model while monthly realized returns do not.
Starting Page	69
Ending Page	91
Page Count	23
File Format	PDF
ISSN	0924865X
Journal	Review of Quantitative Finance and Accounting
Volume Number	11
Issue Number	1
e-ISSN	15737179
Language	English
Publisher	Kluwer Academic Publishers
Publisher Date	1998-01-01
Publisher Place	Boston
Access Restriction	One Nation One Subscription (ONOS)
Subject Keyword	Econometrics Accounting/Auditing Finance /Banking Operation Research/Decision Theory
Content Type	Text
Resource Type	Article
Subject	Finance Accounting

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