Assessing Asset Pricing Models Using Revealed Preference / Jonathan B. Berk, Jules H. van Binsbergen.

Format:

Book

Author/Creator:

Berk, Jonathan B.

Contributor:

National Bureau of Economic Research.

van Binsbergen, Jules H.

Series:

Working Paper Series (National Bureau of Economic Research) no. w20435.

NBER working paper series no. w20435

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2014.

Summary:

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.

Notes:

Print version record

August 2014.