Finance and Economics Discussion Series

<p>A long standing puzzle in the Capital Asset Pricing Model (CAPM) has been the inability of empirical work to validate it. This paper presents a new approach to estimating the CAPM taking into account the differences between observable and expected returns for risky assets and for the market portfolio of all traded assets as well as inherent nonlinearities and the effects of excluded variables. Using this approach we provide evidence that the relation between the observable returns on stock and market portfolios is nonlinear.</p><p>This work has been selected by scholars as being culturally important and is part of the knowledge base of civilization as we know it. This work was reproduced from the original artifact and remains as true to the original work as possible. Therefore you will see the original copyright references library stamps (as most of these works have been housed in our most important libraries around the world) and other notations in the work.</p><p>This work is in the public domain in the United States of America and possibly other nations. Within the United States you may freely copy and distribute this work as no entity (individual or corporate) has a copyright on the body of the work.</p><p>As a reproduction of a historical artifact this work may contain missing or blurred pages poor pictures errant marks etc. Scholars believe and we concur that this work is important enough to be preserved reproduced and made generally available to the public. We appreciate your support of the preservation process and thank you for being an important part of keeping this knowledge alive and relevant.</p>