Assessing Asset Pricing Models Using Revealed Preference

Jonathan B. Berk and Jules van Binsbergen

No 20435, NBER Working Papers from National Bureau of Economic Research, Inc

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 the model has been shown to perform poorly relative to other models in explaining cross sectional variation in expected returns, is an important puzzle for future research. We also document that a large fraction of mutual fund flows remain unexplained.

JEL-codes: D14 D24 E2 E22 E44 G0 G00 G1 G10 G11 G12 G2 G20 G23 (search for similar items in EconPapers)
Date: 2014-08
New Economics Papers: this item is included in nep-fmk and nep-mac
Note: AP CF
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Citations: View citations in EconPapers (4)

Published as Jonathan B. Berk & Jules H. van Binsbergen, 2016. "Assessing asset pricing models using revealed preference," Journal of Financial Economics, vol 119(1), pages 1-23.

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Related works:
Journal Article: Assessing asset pricing models using revealed preference (2016)
Working Paper: Assessing Asset Pricing Models Using Revealed Preference (2015)
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