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We test the CAPM conditional on agents’ information by replacing a value-weighted stock index traditionally used as proxy for the market portfolio by the optimal informed investors’ portfolio derived in Burlacu, Guéniche and Jimenez-Garcès (2016). Indeed, in asset-pricing tests, realized stock returns are used as proxy for expected stock returns. However, stock returns being realized on the basis of all the investors’ information, the conditional CAPM can only be tested with a portfolio conditional on public as well as private information. We provide a test free of theoretical critics, whether on a misspecification of the market portfolio or the inability of testing conditional models. We show that conditioning on informed investors’ information allows estimating the real beta. Moreover, the optimal informed investors’ portfolio being not subject to the informational risk, we find empirical evidence that it allows estimating more precisely the market risk premium, while the use of a stock index does not disentangle it from the information risk premium.
Author(s):
Alain Guéniche
CERAG
France
Radu Burlacu
CERAG
France
Sonia Jimenez-Garcès
CERAG
France