Veranstaltung
03
Apr 2017

14:15 - 15:45
IWH Research Seminar

On the Robustness of the Unlevered Capital Asset Pricing Model

Firms’ financial leverage can largely explain the value effect, however, we document that the expected return-beta relationship of equity in unconditional tests of the CAPM is more generally distorted by leverage.

Wer
Lammertjan Dam  (University of Groningen)
Wo
conference room, Leipziger Straße 100
Lammertjan Dam

Zur Person

Dr Lammertjan Dam is an Assistant Professor at Department of Economics at the University of Groningen.

Firms’ financial leverage can largely explain the value effect, however, we document that the expected return-beta relationship of equity in unconditional tests of the CAPM is more generally distorted by leverage. We show that unlevered betas explain the cross-sectional variation in average unlevered returns for various portfolio sorts. The model outperforms the traditional CAPM and the Fama and French (1993) three-factor model. We address the implications for levered returns with a two-beta model that accounts for the leverage-risk premium interaction. The robustness of the results and the theoretical underpinnings advocate for the use of unlevered returns in asset pricing tests.

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