This paper uses a functional coefficient regression to estimate time-varying betas and alphas in the conditional capital asset pricing model. Functional coefficient representation relaxes the strict assumptions on the structure of betas and alphas by combining the predictors into an index that best captures time variations in betas and alphas and estimates them nonparametrically. This index in ...

Forward exchange rate unbiasedness is rejected in tests from the current floating exchange rate era. This paper surveys advances in this area since the publication of Hodrick's (1987) survey. It documents that the change in the future exchange rate is generally negatively related to the forward discount. Properties of the expected forward forecast error are reviewed. Issues such as the relation...

The Monetary Control Act of 1980 requires the Federal Reserve System to provide payment services to depository institutions through the twelve Federal Reserve Banks at prices that fully reflect the costs a private‐sector provider would incur, including a cost of equity capital (COE). Although Fama and French (1997) conclude that COE estimates are “woefully” and “unavoidably” im...

For one–period projects under certainty, the notion of Net Present Value (NPV) formally translates the notion of economic profit, where the discount rate is the cost of capital. Under uncertainty, the cost of capital is the expected rate of return of an equivalent-risk alternative that the investor might undertake and is often found by making recourse to the Capital Asset Pricing Model. This pa...

Shariah compliant firms operating in an environment with little to no access a robust Islamic capital market (such as the United States (US) stock market) will exhibit consistent bias towards certain corporate financial behaviour. Does this subsequently lead skewed asset pricing behaviour? To answer question, paper investigates behaviour of multiple samples listed US compared overall convention...

Does Subjective Evaluation of Probability Impact Asset Prices? The Nobel Prize–winning capital asset pricing model (CAPM) predicts that expected excess return any is positively proportional to its exposure the overall market: beta, leading an upward-sloping security market line. However, this prediction contradicted by empirical studies return–beta slope often flat or even downward-sloping, a p...

This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the CAPM and the Fama-French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily p...

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The existence of mean-variance efficient positive portfolios – portfolios with no negative weights – is a key requirement for equilibrium in the Capital Asset Pricing Model (CAPM). Brennan and Lo (2010) define an “impossible frontier” as a frontier on which all portfolios have at least one negative weight. They prove that for randomly drawn covariance matrices the probability of obtaining an im...

Article history: Received 3 August 2014 Received in revised form 27 September 2014 Accepted 24 October 2014 Available online 3 November 2014