An Exact Bayes Test of Asset Pricing Models with Application to International Markets
An Exact Bayes Test of Asset Pricing Models with Application to International Markets
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Publication or External Link
Date
2006
Authors
Avramov, Doron
Chao, John C.
Advisor
Citation
Avramov, Doron, and John Chao, 2006, “An Exact Bayes Test of Asset Pricing Models with Application to International Markets,” Journal of Business 79, 293-323.
DRUM DOI
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 non-nested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international CAPM 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.