Students: Dissertation: Ying-Jen Chen

Ying-Jen Chen

ABSTRACT
The trade-off between risk and return in financial assets has been an enduring subject of inquiry in the field of Finance. Despite the rapid progress both theoretically and empirically during the past four decades, the effort has been eclipsed by anomalous phenomena to which the traditional models, such as the Capital Asset Pricing Model (CAPM), provide little explanation. One of the problems with the CAPM is the unobservable market portfolio. The consequence of the usual practice of adopting a broad-based market index to proxy the market portfolio has been shown nontrivial in empirical works, which makes the interpretation of empirical evidences rather difficult. In other words, the concept of absolute efficiency embedded in the CAPM seems unattainable empirically and practically.

Hsia (1997) proposes a new model, dubbed Relative Efficiency Asset Pricing Model (REAPM), founded on the concept of relative efficiency that avoids the measurement problem associated with the market portfolio in the CAPM. The dissertation seeks to test the new model empirically, and then contrast the model to the CAPM. The tests indicate that the risk measure proposed by the new model, Theta, displays better explanatory power over the cross-section of expected returns than the CAPM Beta. The contrast between the new model and another empirically developed model, dubbed Fama-French Three-Factor Model (FF model), is also carried out. The evidences again favor the REAPM. It is also found, however, that the test results on the FF model presented herein contradict those found in the literature. Due to methodological differences, the contradiction is difficult to reconcile, and therefore requires further research to shed light on the issue.

Friday, December 1, 2000
DISSERTATION COMMITTEE
Chi-Cheng Hsia, Chairman
Nancy A. Perrin
Thomas P. Potiowsky
Martin Zwick
James A. Paulson, Graduate Studies Rep.