The performance of Asset Pricing Models in Times of Bubbles
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2021-12-14
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en
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The performance of asset pricing models in times of bubbles
In this paper we research the performance of three different asset pricing models, CAPM, Fama-French 3 factor and Momentum model, during times of a market wide bubble compared to times of no bubble. We do so by using a two-step regression approach, similar to Fama and MacBeth (1973). We do this regression analysis on portfolios formed bivariate on Size/Book to Market ratio and Operating Profitability/Investment, using two sets of cut off points, 30th/70th percentile and quintiles. Contrary to literary findings, we find that for our dataset all three of these models do not hold. Furthermore, we find no difference between the performance of asset pricing models in times of a bubble compared to no bubble. We do find that the explanatory power increases when adding the Size and Book to Market factor for the Fama-French model and when adding the Momentum factor for the Momentum model.
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Faculteit der Managementwetenschappen