On tests of the conditional relationship between beta and returns

Ian Cooper

Applied Financial Economics, 2009, vol. 19, issue 6, 427-432

Abstract: The Pettengill et al. (1995) test of the conditional relationship between beta and returns has recently become widely used. This article shows that there is a large bias in that test. The test is almost guaranteed to be satisfied, regardless of the model that generates expected returns. In particular, even if the Capital Asset Pricing Model (CAPM) is not true and expected returns and beta are unrelated, the test will detect statistically significant results of the size that they report in line with their hypothesis. The reason for the bias is that the ex post selection criterion used to partition data automatically generates coefficient values that the test interprets as being evidence in favour of the CAPM.

Date: 2009
References: Add references at CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603100801964388 (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:taf:apfiec:v:19:y:2009:i:6:p:427-432

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603100801964388

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().