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Extending the capital asset pricing model: the reward beta approach

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Abstract:

Abstract

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.

Keywords: Asset pricing; Book-to-market effect; G12; G24; G31; Reward beta; Size effect; capital asset pricing model

Document Type: Research Article

DOI: http://dx.doi.org/10.1111/j.1467-629X.2007.00202.x

Affiliations: Department of Accounting, Finance and Economics, Griffith University, Gold Coast, 9726, Australia

Publication date: March 1, 2007

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