TY - JOUR
AU - Frankel, Jeffrey A
AU - Dickens, William T
TI - Are Asset Demand Functions Determined by CAPM?
JF - National Bureau of Economic Research Working Paper Series
VL - No. 1113
PY - 1983
Y2 - April 1983
DO - 10.3386/w1113
UR - http://www.nber.org/papers/w1113
L1 - http://www.nber.org/papers/w1113.pdf
N1 - Author contact info:
Jeffrey A. Frankel
Harvard Kennedy School
79 JFK Street
Cambridge, MA 02138
Tel: 617/496-3834
Fax: 617/496-5747
E-Mail: jeffrey_frankel@harvard.edu
William Dickens
School of Public Affairs
University of Maryland
College Park, Maryland 20742-1821
Tel: 301 405-3494
E-Mail: wtdickens@gmail.com
AB - The Capital Asset Pricing Model (CAPH) says that the responsiveness of asset-demands to expected returns depends (inversely) on the variance-covariance matrix of returns, rather than being an arbitrary set of parameters.Previous tests of CAPM have usually computed covariances of returns around sample means, and then checked whether the riskier assets are those with the higher mean returns. We offer a new technique for testing CAPM. The technique requires the use of time series data on actual asset-holdings, and non-linear maximum likelihood estimation. We claim superiority to earlier tests on three grounds. (1) We allow expected returns to vary freely overtime.(2) The alternative hypothesis is well-specified: asset-demands are linear functions of expected returns that do not depend on the variance-covariance matrix.(3) The test-statistic has a known distribution; it is simply a likelihood ratio test. We try the technique on yearly data, 1954-1980, for household holdings of a portfolio of six assets: short-term bills and deposits, tangible assets, federal debt, state and local debt, corporate debt, and equities. Our test rejects the CAPM hypothesis.
ER -