Extending the capital asset pricing model: the reward beta approach
This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the capital asset pricing model (CAPM) and the Fama–French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily passes the same test. In robustness checks, the reward beta approach consistently outperforms both the CAPM and the three-factor model.
Document Type: Research Article
Affiliations: Department of Accounting, Finance and Economics, Griffith University, Gold Coast, 9726, Australia
Publication date: March 1, 2007