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

Loading next page...
 
/lp/wiley/using-expectations-to-test-asset-pricing-models-pUc1D0ExIx
Publisher
Wiley
Copyright
Copyright © 2005 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0046-3892
eISSN
1755-053X
D.O.I.
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

References

You’re reading a free preview. Subscribe to read the entire article.


DeepDyve is your
personal research library

It’s your single place to instantly
discover and read the research
that matters to you.

Enjoy affordable access to
over 18 million articles from more than
15,000 peer-reviewed journals.

All for just $49/month

Explore the DeepDyve Library

Search

Query the DeepDyve database, plus search all of PubMed and Google Scholar seamlessly

Organize

Save any article or search result from DeepDyve, PubMed, and Google Scholar... all in one place.

Access

Get unlimited, online access to over 18 million full-text articles from more than 15,000 scientific journals.

Your journals are on DeepDyve

Read from thousands of the leading scholarly journals from SpringerNature, Elsevier, Wiley-Blackwell, Oxford University Press and more.

All the latest content is available, no embargo periods.

See the journals in your area

DeepDyve

Freelancer

DeepDyve

Pro

Price

FREE

$49/month
$360/year

Save searches from
Google Scholar,
PubMed

Create lists to
organize your research

Export lists, citations

Read DeepDyve articles

Abstract access only

Unlimited access to over
18 million full-text articles

Print

20 pages / month

PDF Discount

20% off