Empirical likelihood based nonparametric testing for CAPM

Abstract

The Capital Asset Pricing Model (CAPM) predicts a linear relation between assets' return and their betas. However, there is empirical evidence that such a relationship does not necessarily occur, and in some cases it might even be nonlinear. In this paper we explore a nonparametric approach where the linear specification is tested against a nonparametric alternative. This methodology is implemented on S&P500 data.