Testing the CAPM revisited

This paper re-examines the tests of the Sharpe–Lintner Capital Asset Pricing Model (CAPM). The null that the CAPM intercepts are zero is tested for ten size-based stock portfolios and for twenty five book-to-market sorted portfolios using five-year, ten-year and longer sub-periods during 1965–2004. The paper shows that the evidence for rejecting the CAPM on statistical grounds is weaker than the consensus view suggests, and highlights the pitfalls of testing multiple hypotheses with the conventional heteroskedasticity and autocorrelation robust (HAR) test with asymptotic P-values. The conventional test rejects the null for almost all sub-periods, which is consistent with the evidence in the literature. By contrast, the null is not rejected for most of the sub-periods by the new HAR tests developed by Kiefer et al. (2000), Kiefer and Vogelsang (2005), and Sun et al. (2008).     

Fiscal consolidation with high growth: A policy simulation model for India

In this paper a fiscal consolidation program for India has been presented based on a policy simulation model that enables us to examine the macroeconomic implications of alternative fiscal strategies, given certain assumptions about other macro policy choices and relevant exogenous factors. The model is then used to estimate the outcomes resulting from a possible strategy of fiscal consolidation in the base case. The exercise shows that it is possible to have fiscal consolidation while at the same time maintaining high GDP growth of around 8% or so. The strategy is to gradually bring down the revenue deficit to zero by 2014–15, while allowing a combined fiscal deficit for centre plus states of about 6% of GDP. This provides the space for substantial government capital expenditure, which translates to a significant public investment program. This in turn leads to high overall investment directly and indirectly, via the crowding in effect on private investment, which drives the high GDP growth. The exercise has also tested the robustness of this strategy under two alternative scenarios of higher and lower advanced country growth compared to the base case.     

Allocating Profit Among Rational Players in a Fuzzy Coalition: A Game Theoretic Model

In this paper, the problem of allocation of the profit, obtained from a fuzzy coalition, among its players is considered. It is argued that this allocation is influenced by satisfaction of the players in regards to better performance and success within a cooperative endeavour. Our model is based on the real life situations, where possibly one or more players compromise on their payoffs in order to help forming a coalition. We have developed a dynamic approach to obtain a suitable solution to the corresponding cooperative fuzzy game. Further, the notion of a penalty among the bargaining players is introduced. This would inflict them to reasonable demands only.     

The performance of heteroskedasticity and autocorrelation robust tests: a Monte Carlo study with an application to the three‐factor Fama–French asset‐pricing model

This paper illustrates the pitfalls of the conventional heteroskedasticity and autocorrelation robust (HAR) Wald test and the advantages of new HAR tests developed by Kiefer and Vogelsang in 2005 and by Phillips, Sun and Jin in 2003 and 2006. The illustrations use the 1993 Fama–French three‐factor model. The null that the intercepts are zero is tested for 5‐year, 10‐year and longer sub‐periods. The conventional HAR test with asymptotic P‐values rejects the null for most 5‐year and 10‐year sub‐periods. By contrast, the null is not rejected by the new HAR tests. This conflict is explained by showing that inferences based on the conventional HAR test are misleading for the sample sizes used in this application. Copyright © 2007 John Wiley & Sons, Ltd.