The Capital Asset Pricing Model in conjunction with the usual market model assumptions implies that well-diversified portfolios should be mean variance efficient and ,hence, betas computed with respect to such indices should completely explain expected returns on individual assets. In fact,...

This paper discusses inference for rational expectations models estimated via minimum distance methods by characterizing the probability beliefs regarding the data generating process (DGP) that are compatible with given moment conditions. The null hypothesis is taken to be rational expectations...

This paper provides a road map for building a contingent claims theory of limit order markets grounded in a simple observation: limit orders are equivalent to a portfolio of cash-or-nothing and asset-or-nothing digital options on market order flow. However, limit orders are not conventional...

This essay reviews the extensive literature on empirical testing of asset pricing models. It briefly describes the kinds of asset pricing models typically tested in the literature and explicates their econometric implications, both in terms of the estimation of relevant parameters and tests of...

The efficient markets hypothesis has dominated modern research on asset prices. Asset prices and their intrinsic values differ in inefficient financial markets but difficulties in the measurement of intrinsic value greatly complicate market efficiency tests. Reflections on the measurement of...

In a Modigliani-Miller world, price equals the risk-adjusted present value of future dividends and dividend policy is irrelevant for asset pricing. This paper searches for cash flows with two characteristics: asset prices can be calculated from their present values and they are invariant with...

Much of the theoretical basis for current monetary and financial theory rests on the economic efficiency of financial markets. Not surprisingly, considerable effort has been expended to test the efficient markets hypothesis, usually by examination of the predictability of equity returns....

The Arbitrage Pricing Theory (APT) of Ross (1976) presumes that a factor model describes security returns. In this paper, we provide a comprehensive examination of the merits of various strategies for constructing basis portfolios that are, in principle, highly correlated with the common factors...

This paper provides a detailed and extensive examination of the validity of the APT based on maximum likelihood factor analysis of large cross-sections of securities. Our empirical implementation of the theory proved in capable of explaining expected returns on portfolios composed of securities...

Our primary goal in this paper is to ascertain whether the absolute and relative rankings of managed funds are sensitive to the benchmark chosen to measure normal performance. We employ the standard CAPM benchmarks and a variety of APT benchmarks to investigate this question. We found that there...