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Breathing room for beta

Sharon Kozicki () and Pu Shen

No 97-06, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: This paper argues that a test of beta insignificance, commonly used in empirical studies of the CAPM, predisposes studies toward rejecting the CAPM. Under the null hypothesis of these tests, the CAPM is false. Consequently, insufficient evidence to reject the null is taken as sufficient evidence to reject the CAPM. Simulations suggest that this framework typically leads to false rejection rates of more than 1/2. An alternative test, with a null hypothesis consistent with the CAPM, is proposed. Based on statistics from published studies, the proposed test does not reject the CAPM.

Keywords: capital; asset; pricing; model (search for similar items in EconPapers)
Date: 1997
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Handle: RePEc:fip:fedkrw:97-06