An Exact Bayes Test of Asset Pricing Models with Application to International Markets

Download or read book An Exact Bayes Test of Asset Pricing Models with Application to International Markets written by Doron Avramov and published by . This book was released on 2003 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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 speci fications, 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.