This paper develops and implements an exact finite-sample test of asset pricing models with time varying risk premia using posterior probabilities. The strength of our approach is that it allows multiple conditional asset pricing specifications, both nested and non-nested, to be tested and compared simultaneously. We apply our procedure to international equity markets by testing and comparing the international CAPM and conditional ICAPM versions of Fama and French (1998).
An Exact Bayes Test of Asset Pricing Models with Application to International MarketsDoron Avramov and John Chao ,
1( 79 )
Journal of Business