Working Paper

Breathing room for beta

Abstract: This paper argues that a test of beta insignificance, commonly used in empirical studies of the CAPM, predisposes studies toward rejecting the CAPM. Under the null hypothesis of these tests, the CAPM is false. Consequently, insufficient evidence to reject the null is taken as sufficient evidence to reject the CAPM. Simulations suggest that this framework typically leads to false rejection rates of more than 1/2. An alternative test, with a null hypothesis consistent with the CAPM, is proposed. Based on statistics from published studies, the proposed test does not reject the CAPM.

Keywords: capital asset pricing model;

Bibliographic Information

Provider: Federal Reserve Bank of Kansas City

Part of Series: Research Working Paper

Publication Date: 1997

Number: 97-06