Emprical Validity of Asset pricing models in Iran's Stock Market: Application of Optimal Significance Level and Equal Probability Test

Document Type : Original Article

Authors

1 Assistant Professor in Economics, Department of Economics, University of Allameh Tabataba'i

2 Ph.D. Student in Economics, Department of Economics, University of Allameh Tabataba'i

Abstract

One of the most usage of evaluating Empirical Validity of Asset-pricing Models is GRS test. In this paper we implement the GRS test for CAPM and Fama-French 3-factor asset pricing models with explicit consideration of statistical power, by employing the optimal significance level and equal-probability test. In this regard we use the 25 size-B/M portfolios analysed by Fama and French to facilitate the empirical comparison among the alternative models. The result show GRS test rejects all two asset pricing models at the conventional significance level.. At the optimal significance, we find that the GRS test cannot reject the null hypothesis of portfolio efficiency most of the time for CAPM and Fama-French 3-factor models.

Keywords

Journal of Econometric Modelling
Volume 3, Issue 1 - Serial Number 8
December 2018
Pages 135-163

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