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Robust informational tests on the CAPM

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  • Salvatore Terregrossa

Abstract

The paper demonstrates the existence of an independent informational content in the Capital Asset Pricing Model (CAPM) that financial analysts are not fully utilizing in their forecast-generating mechanism. This existence is discovered by regressing actual values of five-year firm earnings growth against financial analysts ex-ante forecasts and simulated ex-ante forecasts generated by the CAPM. Regressions are run over a cross-section of firms for each of four adjacent five-year horizons: January 1982-1987; 1983-1988; 1984-1989; 1985-1990. In three out of four test periods, the coefficient of the CAPM forecasts is significantly positive. This is essentially the same experiment with the same results as obtained previously, with one exception: a diagnostic analysis and corrective procedures are performed and results are generated that are heteroscedasticity-robust.

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  • Salvatore Terregrossa, 2001. "Robust informational tests on the CAPM," Applied Economics Letters, Taylor & Francis Journals, vol. 8(2), pages 121-124.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:2:p:121-124
    DOI: 10.1080/13504850150204183
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    References listed on IDEAS

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    1. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    2. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    3. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 33(1), pages 125-132.
    4. Salvatore Terregrossa, 1999. "Combining analysts' forecasts with causal model forecasts of earnings growth," Applied Financial Economics, Taylor & Francis Journals, vol. 9(2), pages 143-153.
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    Cited by:

    1. Salvatore Terregrossa, 2005. "On the efficacy of constraints on the linear combination forecast model," Applied Economics Letters, Taylor & Francis Journals, vol. 12(1), pages 19-28.
    2. TERREGROSSA Salvatore, 2010. "On the Efficacy of Constraints on the Linear Combination Forecast Model," EcoMod2003 330700144, EcoMod.

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