An exact bayes test of asset pricing models with application to international markets

Doron Avramov*, John C. Chao

*Corresponding author for this work

Research output: Contribution to journalReview articlepeer-review

13 Scopus citations

Abstract

This paper develops and implements an exact finite-sample test of asset pricing models with time-varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing specifications, both nested and nonnested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international Capital Asset Pricing Model (ICAPM) and conditional ICAPM versions of Fama and French (1998). The empirical evidence suggests that the best performing model is the ICAPM with the value premium constructed based on global earnings-to-price ratio.

Original languageAmerican English
Pages (from-to)293-323
Number of pages31
JournalJournal of Business
Volume79
Issue number1
DOIs
StatePublished - Jan 2006
Externally publishedYes

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