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A critique of the asset pricing theory's tests. Part I: On past and potential testability of the theory

Roll, Richard (1977) A critique of the asset pricing theory's tests. Part I: On past and potential testability of the theory. Journal of Financial Economics, 4 (2). pp. 129-176. ISSN 0304-405X. doi:10.1016/0304-405X(77)90009-5.

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Testing the two-parameter asset pricing theory is difficult (and currently infeasible). Due to a mathematical equivalence between the individual return/‘beta’ linearity relation and the market portfolio's mean-variance efficiency, any valid test presupposes complete knowledge of the true market portfolio's composition. This implies, inter alia, that every individual asset must be included in a correct test. Errors of inference inducible by incomplete tests are discussed and some ambiguities in published tests are explained.

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Additional Information:© 1977 Published by Elsevier B.V. This is Part I of a three-part study. Parts II and III are summarized in the introduction here, but will appear in later issues. A copy of the complete paper can be obtained by writing the author at: Graduate School of Management, University of California, Los Angeles, CA 90024, USA. This paper was written while the author was at the Centre d'Enseignement Supérieur des Affaires, France. Eugene Fama, Michael C. Jensen, John B. Long, Jr., Stephen Ross and Bruno H. Solnik provided many useful comments and Patricia Porter provided excellent secretarial service. While the paper was being written, Fama pointed out that his new book (1976) contains some of the same analysis and conclusions. New papers by Stephen Ross (forthcoming) and John B. Long (1976) contain results emphasized, and formerly believed to have been discovered, here. The reader will be able to verify, however, that most of this material is non-redundant. To the authors criticised here: these papers were singled out because they are the best and most widely read on the subject. I have written some papers in this area too and have taught the subject to a number of unsuspecting students. So, the absence of detailed self-criticism should be attributed to the greater importance of the other papers and does not imply any personal prescience. None was present.
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Official Citation:Richard Roll, A critique of the asset pricing theory's tests Part I: On past and potential testability of the theory, Journal of Financial Economics, Volume 4, Issue 2, 1977, Pages 129-176, ISSN 0304-405X, (
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:95109
Deposited By: Tony Diaz
Deposited On:30 Apr 2019 19:57
Last Modified:16 Nov 2021 17:10

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