Chapter 13 – Empirical Evidence on Security Returns
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CHAPTER THIRTEEN
EMPIRICAL EVIDENCE ON SECURITY RETURNS
CHAPTER OVERVIEW
This chapter revisits literature on empirical tests of security returns. Tests of the CAPM and the APT are
introduced in the first section of the chapter. The text then describes the method of testing and presents
LEARNING OBJECTIVES
Upon completion of this chapter the student should have an understanding how tests of single and
PRESENTATION OF MATERIAL
13.1 The Index Model and the Single-Factor APT
The structure of tests of the single factor model is contained in this first discussion. Class discussion on
how a test is structured will make later discussion of multifactor tests easier to understand. Generally, the
13.2 Tests of Multifactor CAPM and APT
Three factors are likely to augment the market risk factor and labor income is looked into in more detail.
The study by Jaganathan and Wang showed that when cyclical factors and nontraded human capital were
Chapter 13 – Empirical Evidence on Security Returns
13.3 The Fama-French-TypeFactor Models
Fama and French concluded that the single factor model is not supported by security return data. They
found that the book-to-market ratio and firm size were important in the return relationship. They also
13.4 Liquidity and Asset Pricing
Effect of liquidity on asset expected return stems for two factors: transactions costs are dominated by the
13.5 Consumption—Based Asset Pricing and the Equity Premium Puzzle