An empirical investigation of asset pricing models under divergent lending and borrowing rates

Yacine Hammami ()

Financial Markets and Portfolio Management, 2014, vol. 28, issue 3, 263-279

Abstract: Asset pricing theory implies that the estimate of the zero-beta rate should fall between divergent lending and borrowing rates. This paper proposes a formal test of this restriction using the difference between the prime loan rate and the 1-month Treasury bill rate as a proxy for the difference between borrowing and lending rates. Based on simulations, this paper shows that in the ordinary least squares case, the Fama and MacBeth (J Pol Econ 81:607–636, 1973 ) t-statistic has high power against a general alternative, which is not true of the Shanken (Rev Financ Stud 5:1–33, 1992 ) and Kan et al. (J Financ doi: 10.1111/jofi.12035 , 2013 ) t-statistics. In the generalized least squares case, all three t-statistics have high power. The empirical investigation highlights that only the intertemporal capital asset pricing model reasonably prices the zero-beta portfolio. Other models, such as the Fama and French (J Financ Econ 33:3–56, 1993 ) model, do not assign the correct value to the zero-beta rate. Copyright Swiss Society for Financial Market Research 2014

Keywords: Asset pricing models; Two-pass cross-sectional regressions; Zero-beta portfolio; Misspecification-robust t-ratio; C10; G10; G12 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1007/s11408-014-0233-1 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:fmktpm:v:28:y:2014:i:3:p:263-279

Ordering information: This journal article can be ordered from
http://www.springer. ... nt/journal/11408/PS2

DOI: 10.1007/s11408-014-0233-1

Access Statistics for this article

Financial Markets and Portfolio Management is currently edited by Manuel Ammann

More articles in Financial Markets and Portfolio Management from Springer, Swiss Society for Financial Market Research Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().