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Breathing Room for BetaSharon Kozicki |
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 doesn't reject the CAPM. Keywords: Capital Asset Pricing Model Sharon Kozicki is a senior economist and Pu Shen is an economist at the Federal Reserve Bank of Kansas City. The authors are grateful to Rob Neal, Vance Roley, and Frank Diebold for discussions and comments. Doug Rolph provided excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the Federal Reserve Banks of Kansas City, or the Federal Reserve System.Kozicki e-mail: sharon.kozicki@kc.frb.org
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