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Using Expectations to Test Asset Pricing Models

Using Expectations to Test Asset Pricing Models Asset pricing models generate predictions relating assets' expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts' expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts' expectations are unbiased estimates of market‐wide expected rates of return, we can circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive, robust relation between expected return and market beta and a negative relation between expected return and firm size, consistent with the notion that these are risk factors. We do not find that high book‐to‐market firms are expected to earn higher returns than low book‐to‐market firms, inconsistent with the notion that book‐to‐market is a risk factor. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Financial Management Wiley

Using Expectations to Test Asset Pricing Models

Financial Management , Volume 34 (3) – Sep 1, 2005

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References (46)

Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0046-3892
eISSN
1755-053X
DOI
10.1111/j.1755-053X.2005.tb00109.x
Publisher site
See Article on Publisher Site

Abstract

Asset pricing models generate predictions relating assets' expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts' expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts' expectations are unbiased estimates of market‐wide expected rates of return, we can circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive, robust relation between expected return and market beta and a negative relation between expected return and firm size, consistent with the notion that these are risk factors. We do not find that high book‐to‐market firms are expected to earn higher returns than low book‐to‐market firms, inconsistent with the notion that book‐to‐market is a risk factor.

Journal

Financial ManagementWiley

Published: Sep 1, 2005

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