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Systematic Risk and Empirical Research

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  • David Ashton
  • Mark Tippett

Abstract

We show here that risky asset returns generating processes stated in terms of factors which include both accounting and non‐accounting based measures of risk (e.g. book to market ratios) imply, under fairly standard regularity conditions, that the Sharpe‐Lintner‐Black asset pricing model beta is a ‘sufficient’ statistic in the sense that it captures all important attributes of the returns generating process in a single number. We then derive the parametric relationship between betas based on inefficient index portfolios and betas based on the market or tangency portfolio. We demonstrate that the relationship between risky asset expected returns and betas computed on the basis of inefficient index portfolios is both consistent with the predictions of the Capital Asset Pricing Model and the multi‐factor asset pricing models of Fama and French (1992, 1993, 1995 and 1996). The ‘trick’ is to realise that inefficient index portfolios are composed of the market portfolio and a collection of inefficient but self financing ‘kernel’ or ‘arbitrage’ portfolios. It then follows that there is a perfect linear cross sectional relationship between risky asset expected returns, betas based on inefficient index portfolios and the arbitrage portfolios. Hence, if we happen to stumble across variables that span the same subspace as the vectors representing the arbitrage portfolios, it is easy to create the illusion that risky asset expected returns depend on variables other than ‘beta’.

Suggested Citation

  • David Ashton & Mark Tippett, 1998. "Systematic Risk and Empirical Research," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(9‐10), pages 1325-1356, November.
  • Handle: RePEc:bla:jbfnac:v:25:y:1998:i:9-10:p:1325-1356
    DOI: 10.1111/1468-5957.00240
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    Cited by:

    1. Alan Gregory, 2005. "The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5‐6), pages 777-814, June.
    2. Daniel Chi‐Hsiou Hung & Mark Shackleton & Xinzhong Xu, 2004. "CAPM, Higher Co‐moment and Factor Models of UK Stock Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1‐2), pages 87-112, January.
    3. Edward Jones & Jonathan Crook, 2009. "Wealth effects to bidding companies from regulatory interventions in the UK," Applied Financial Economics, Taylor & Francis Journals, vol. 19(8), pages 625-634.
    4. Alan Gregory, 2005. "The Long Run Abnormal Performance of UK Acquirers and the Free Cash Flow Hypothesis," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(5-6), pages 777-814.
    5. Alan Gregory & Maria Michou, 2009. "Industry Cost of Equity Capital: UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5‐6), pages 679-704, June.
    6. Seretny Marek & Seretny Aleksandra, 2012. "Sustainable Marketing - a new Era in the Responsible Marketing Development," Foundations of Management, Sciendo, vol. 4(2), pages 63-76, December.
    7. Daniel Chi‐Hsiou Hung & Mark Shackleton & Xinzhong Xu, 2004. "CAPM, Higher Co‐moment and Factor Models of UK Stock Returns," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(1‐2), pages 87-112, January.
    8. Alan Gregory & Maria Michou, 2009. "Industry Cost of Equity Capital: UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 679-704.
    9. Guermat, Cherif, 2014. "Yes, the CAPM is testable," Journal of Banking & Finance, Elsevier, vol. 46(C), pages 31-42.

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