Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments February 29, 2008 erstellt
Description:
The reason for the failure of asset pricing models can be divided into three categories: Transaction costs, investor irrationality, or missing risk factors. This study investigates which of the three categories best explains the poor performance of asset pricing models. We regress the differences between the expected return and the realized return on variables related to the failure of asset pricing models. First, we find that both transaction costs and investor irrationality are significantly related to the differences between the realized return and the expected return from the capital asset pricing model (CAPM) even after size and book-to-market are con-trolled. Second, we implement the same testing procedure for the CAPM to other 6 asset pricing models. The results of these regressions are all similar to those for the CAPM. Moreover, most of the Wald tests cannot reject the null hypothesis that the coefficients of asset pricing models are the same except for the consumption CAPM and the conditional CAPM. These results indicate that models with more risk factors than the CAPM cannot improve the CAPM's failure caused by transaction costs and investor irrationality. There-fore, we argue that transaction costs and investor irrationality present a fundamental limit to the improvement of an asset pricing model that cannot be compensated by additional factors