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Unit roots in the CAPM?

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  • Raphael Markellos
  • Terence Mills

Abstract

Excess returns calculated using nonstationary risk-free interest rates will also be nonstationary and this may cause an unbalanced regression problem in the estimation of Capital Asset Pricing Models (CAPM). Under such circumstances, beta coefficients could be both biased and inconsistent. The implications of these issues are investigated through a simulation study and an empirical application using data on the FTA index and the 91-day UK Treasury Bill (T-Bill) rates. Although the simulation results are alarming, the empirical analysis suggests that the problem of unbalanced regression is not likely to cause significant problems in estimating the CAPM.

Suggested Citation

  • Raphael Markellos & Terence Mills, 2001. "Unit roots in the CAPM?," Applied Economics Letters, Taylor & Francis Journals, vol. 8(8), pages 499-502.
    • Handle: RePEc:taf:apeclt:v:8:y:2001:i:8:p:499-502
    DOI: 10.1080/13504850010017690
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    Cited by:

    1. Raphael Markellos, 2004. "Diversification benefits in trading?," Applied Financial Economics, Taylor & Francis Journals, vol. 14(1), pages 13-17.
    2. Christoph Wegener & Tobias Basse, 2019. "The Stability of Factor Sensitivities of German Stock Market Sector Indices: Empirical Evidence and Some Thoughts about Practical Implications," JRFM, MDPI, vol. 12(3), pages 1-10, August.
    3. Gawon Yoon, 2005. "Stochastic Unit Roots in the Capital Asset Pricing Model?," Bulletin of Economic Research, Wiley Blackwell, vol. 57(4), pages 369-389, October.

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