Expected and realized returns in conditional asset pricing models: A new testing approach (Esitys European financial management association annual meeting -konferenssissa, Basel 29.6.-2.7. 2016) - UTU Research Portal

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Expected and realized returns in conditional asset pricing models: A new testing approach
(Esitys European financial management association annual meeting -konferenssissa, Basel 29.6.-2.7. 2016)

Authors: Jan Antell, Mika Vaihekoski

Conference name: Eastern finance association annual meeting

Publication year: 2016

Journal: Proceedings of the Annual Meeting of the Eastern Finance Association

Book title : EFA Annual Meetings Proceedings

Web address : https://etnpconferences.net/efa/efa2016/PaperSubmissions/Submissions2016/S-2-12.pdf(external)

Abstract

We develop a new approach for testing conditional asset pricing models by asking what realized returns we would observe, given the pricing model under scrutiny. This avoids the issues in usingrealized returns as a proxy for expected returns. The new approach is used to test the Merton (1973, 1980) model and a long-standing risk-return puzzle: the price of market risk has often turned out to be negative and insigni cant. Comparing the price of market risk estimates from the new and the traditional testing approaches, our results on US data give strong support for the new approach.