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Is estimating the Capital Asset Pricing Model using monthly and short-horizon data a good choice?
Chinh Duc Pham1, Le Tan Phuoc2
1University of Economics and Law, Vietnam National University-Hochiminh/VNU-HCM, Viet Nam.
Heliyon
|August 4, 2020
Summary
Estimating the Capital Asset Pricing Model (CAPM) with daily data and medium-horizon data provides superior results over monthly or short-horizon data. This research highlights daily data
Area of Science:
- Quantitative Finance
- Financial Econometrics
Background:
- The Capital Asset Asset Pricing Model (CAPM) is a cornerstone of modern finance theory.
- Traditional CAPM estimations often utilize monthly or short-horizon data, potentially limiting accuracy.
- Market efficiency assumptions are critical for valid asset pricing models.
Purpose of the Study:
- To investigate the impact of data frequency (daily vs. monthly) on CAPM estimation.
- To evaluate the effect of data horizon (medium vs. short) on CAPM performance.
- To challenge conventional practices in asset pricing by proposing more reliable data frequencies.
Main Methods:
- Employed a Bayesian framework with Gibbs sampling for parameter estimation.
- Utilized both parametric and non-parametric Bayesian estimators and a confidence interval approach.
- Analyzed six datasets (daily, weekly, monthly) from 150 S&P 500 stocks (2007-2019).
Main Results:
- CAPM estimation using daily data showed significantly higher model fit, smaller Beta standard deviation, lower model error, and reduced Alpha compared to monthly data.
- CAPM estimation using medium-horizon data demonstrated significantly higher model fit, smaller Beta standard deviation and Alpha, and fewer zeroed Betas than short-horizon data.
- Daily and medium-horizon data proved more reliable, efficient, and possessed greater forecasting and explanatory power.
Conclusions:
- Daily data is more efficient and reliable for CAPM estimation than monthly data, aligning better with market efficiency.
- Medium-horizon data offers superior performance over short-horizon data in CAPM applications.
- Findings suggest a re-evaluation of common practices in asset pricing research and practice regarding data frequency.
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