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A New Model of Capital Asset PricesCross-Sectional Tests of the ZCAPM

A New Model of Capital Asset Prices: Cross-Sectional Tests of the ZCAPM [This chapter reports formal cross-sectional tests of the empirical ZCAPM compared to popular asset pricing models. As in the previous chapter, our tests utilize all U.S. common stock returns from January 1965 to December 2018. We report extensive out-of-sample Fama and MacBeth (1973) cross-sectional tests of the ZCAPM compared to other asset pricing models. Our goal is to demonstrate using a weight of stock return evidence that the ZCAPM is the dominant asset pricing model relative to existing prominent models. In brief, the results of our tests strongly favor the empirical ZCAPM over other models. In test-after-test, zeta risk loadings in the ZCAPM have the highest t-values in cross-sectional regression analyses in the range of 3–6 that well exceed all multifactors in popular models. Not only are the t-values exceptionally high by any recommended threshold in the asset pricing literature, but zeta risk loadings are consistently positive and significant in terms of pricing return dispersion sensitivity in virtually all test assets investigated here. Additionally, across a variety of test assets, goodness-of-fit as measured by R2\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$R^2$$\end{document} values is exceptionally high in our cross-sectional tests ranging from a low of approximately 70% to a high of 98%. In several commonly used test assets, little or no residual error remains to be explained by other potential factors. By contrast, popular multifactors’ loadings rarely achieve a cross-sectional t-value exceeding 3, are much less consistently priced across different test assets, and have markedly lower R2\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$R^2$$\end{document} values in most test assets. Based on these extensive tests, we conclude that the ZCAPM represents a pathbreaking innovation in asset pricing for academic research and investment practice.] http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png

A New Model of Capital Asset PricesCross-Sectional Tests of the ZCAPM

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Publisher
Springer International Publishing
Copyright
© The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021
ISBN
978-3-030-65196-1
Pages
159 –195
DOI
10.1007/978-3-030-65197-8_7
Publisher site
See Chapter on Publisher Site

Abstract

[This chapter reports formal cross-sectional tests of the empirical ZCAPM compared to popular asset pricing models. As in the previous chapter, our tests utilize all U.S. common stock returns from January 1965 to December 2018. We report extensive out-of-sample Fama and MacBeth (1973) cross-sectional tests of the ZCAPM compared to other asset pricing models. Our goal is to demonstrate using a weight of stock return evidence that the ZCAPM is the dominant asset pricing model relative to existing prominent models. In brief, the results of our tests strongly favor the empirical ZCAPM over other models. In test-after-test, zeta risk loadings in the ZCAPM have the highest t-values in cross-sectional regression analyses in the range of 3–6 that well exceed all multifactors in popular models. Not only are the t-values exceptionally high by any recommended threshold in the asset pricing literature, but zeta risk loadings are consistently positive and significant in terms of pricing return dispersion sensitivity in virtually all test assets investigated here. Additionally, across a variety of test assets, goodness-of-fit as measured by R2\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$R^2$$\end{document} values is exceptionally high in our cross-sectional tests ranging from a low of approximately 70% to a high of 98%. In several commonly used test assets, little or no residual error remains to be explained by other potential factors. By contrast, popular multifactors’ loadings rarely achieve a cross-sectional t-value exceeding 3, are much less consistently priced across different test assets, and have markedly lower R2\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$R^2$$\end{document} values in most test assets. Based on these extensive tests, we conclude that the ZCAPM represents a pathbreaking innovation in asset pricing for academic research and investment practice.]

Published: Mar 2, 2021

Keywords: Asset pricing; Beta risk; CAPM; Cross-sectional regression tests; Empirical ZCAPM; Expectation-maximization (EM) algorithm; Fama and MacBeth; Fama and French; Industry portfolios; Microcap stocks; Multifactor models; Out-of-sample returns; Return dispersion; Securities investment; Signal variable; Stock market; Test assets; ZCAPM; Zero-beta CAPM; Zeta risk

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