Please use this identifier to cite or link to this item: https://doi.org/10.1016/j.qref.2009.05.001
Title: The non-relevance of the elusive holy grail of asset pricing tests: The "true" market portfolio does not alter CAPM validity conclusions
Authors: Low, C. 
Nayak, S.
Keywords: CAPM
Fama-MacBeth tests
Market portfolio
Roll's critique
Issue Date: 2009
Source: Low, C.,Nayak, S. (2009). The non-relevance of the elusive holy grail of asset pricing tests: The "true" market portfolio does not alter CAPM validity conclusions. Quarterly Review of Economics and Finance 49 (4) : 1460-1475. ScholarBank@NUS Repository. https://doi.org/10.1016/j.qref.2009.05.001
Abstract: Empirical evaluations of CAPM usually attach a caveat that rejection is conditional on the choice of market proxy. We explore the criticality of the proxy choice disclaimer. Using different proxies and comprehensive simulations of the unobserved "true" market in Fama-MacBeth tests of CAPM, we find that the significance (t-statistics) corresponding to betas remain consistently unaltered, even if the proxy is a small fraction of or has a low correlation with the true market. The constancy of t-statistics persists in a simulated true-CAPM world as well: if CAPM is indeed valid, the choice of proxy is unlikely to reject it erroneously. Identity of the elusive true market portfolio and the choice of representative proxy cannot overturn conclusions on validity of CAPM based on Fama-MacBeth tests. Roll's Critique, incontrovertible in theory, may be quite forgiving in practice - CAPM cannot be resurrected by a "closer" approximation of the elusive true market portfolio when it has commonly been rejected. © 2009.
Source Title: Quarterly Review of Economics and Finance
URI: http://scholarbank.nus.edu.sg/handle/10635/44438
ISSN: 10629769
DOI: 10.1016/j.qref.2009.05.001
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