publication . Preprint . Report . Other literature type . Article . 2014

Assessing Asset Pricing Models Using Revealed Preference

Jonathan B. Berk; Jules H. van Binsbergen;
Open Access
  • Published: 01 Aug 2014
Abstract
We propose a new method of testing asset pricing models that relies on using quantities rather than prices or returns. We use the capital flows into and out of mutual funds to infer which risk model investors use. We derive a simple test statistic that allows us to infer, from a set of candidate models, the model that is closest to the model that investors use in making their capital allocation decisions. Using this methodology, we find that of the models most commonly used in the literature, the Capital Asset Pricing Model is the closest. The finding that investors’ revealed preferences are most aligned with the Capital Asset Pricing Model despite the fact that...
Subjects
free text keywords: Strategy and Management, Economics and Econometrics, Accounting, Finance, jel:D14, jel:D24, jel:E2, jel:E22, jel:E44, jel:G0, jel:G00, jel:G1, jel:G10, jel:G11, jel:G12, jel:G2, jel:G20, jel:G23, Corporate finance, Economics, Flannery, Capital asset pricing model, Factor analysis, Financial economics, Capital structure, Corporate action

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