An Exact Bayes Test of Asset Pricing Models with Application to International Markets

33 Pages Posted: 12 Nov 2001

See all articles by Doron Avramov

Doron Avramov

Reichman University - Interdisciplinary Center (IDC) Herzliyah

John C. Chao

University of Maryland

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2003

Abstract

This paper develops and implements an exact finite-sample test of asset pricing models with time varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing speci fications, both nested and non-nested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international CAPM and conditional ICAPM versions of Fama and French (1998). The empirical evidence suggests that the best performing model is the ICAPM with the value premium constructed based on global earnings-to-price ratio.

Suggested Citation

Avramov, Doron and Chao, John C., An Exact Bayes Test of Asset Pricing Models with Application to International Markets (August 20, 2003). Available at SSRN: https://ssrn.com/abstract=290281 or http://dx.doi.org/10.2139/ssrn.290281

Doron Avramov (Contact Author)

Reichman University - Interdisciplinary Center (IDC) Herzliyah ( email )

P.O. Box 167
Herzliya, 4610101
Israel

HOME PAGE: http://faculty.idc.ac.il/davramov/

John C. Chao

University of Maryland ( email )

Department of Economics
College Park, MD 20742
United States
301-405-1579 (Phone)
301-408-3542 (Fax)

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