The CAPM Works Better for Average Daily Returns

Abstract

This paper provides cross-sectional tests of the Capital Asset Pricing Model (CAPM). To mitigate problems with noise in realized stock return series, we use a smoothed data series of average daily returns per month. Tests using U.S. stock returns for equal-weighted portfolios indicate that beta is significantly priced for average daily returns. Confirming other studies, beta is not priced for realized monthly returns. Further analyses suggest that popular multi-factors are more significantly priced for average daily returns also. We conclude that CAPM beta is better supported by average daily returns than realized returns.

Keywords: CAPM, cross-sectional tests, expected returns, realized returns

JEL Classification: G12