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- Title
Using Expectations to Test Asset Pricing Models.
- Authors
Brav, Alon; Lehavy, Reuven; Michaely, Roni
- Abstract
Asset pricing models generate predictions relating assets' expected rates of return and their risk attributes. Most tests of these models have employed realized rates of return as a proxy for expected return. We use analysts' expected rates of return to examine the relation between these expectations and firm attributes. By assuming that analysts' expectations are unbiased estimates of market-wide expected rates of return, we can circumvent the use of realized rates of return and provide evidence on the predictions emanating from traditional asset pricing models. We find a positive, robust relation between expected return and market beta and a negative relation between expected return and firm size, consistent with the notion that these are risk factors. We do not find that high hook-to-market firms are expected to earn higher returns than low book-to-market firms, inconsistent with the notion that book-to-market is a risk factor.
- Subjects
RATE of return; BUSINESS size; ASSETS (Accounting); FINANCE; BUSINESS
- Publication
Financial Management (Wiley-Blackwell), 2005, Vol 34, Issue 3, p31
- ISSN
0046-3892
- Publication type
Article
- DOI
10.1111/j.1755-053X.2005.tb00109.x