Financial Markets and Portfolio Management

, Volume 28, Issue 3, pp 263–279 | Cite as

An empirical investigation of asset pricing models under divergent lending and borrowing rates

  • Yacine HammamiEmail author


Asset pricing theory implies that the estimate of the zero-beta rate should fall between divergent lending and borrowing rates. This paper proposes a formal test of this restriction using the difference between the prime loan rate and the 1-month Treasury bill rate as a proxy for the difference between borrowing and lending rates. Based on simulations, this paper shows that in the ordinary least squares case, the Fama and MacBeth (J Pol Econ 81:607–636, 1973) t-statistic has high power against a general alternative, which is not true of the Shanken (Rev Financ Stud 5:1–33, 1992) and Kan et al. (J Financ doi:, 2013) t-statistics. In the generalized least squares case, all three t-statistics have high power. The empirical investigation highlights that only the intertemporal capital asset pricing model reasonably prices the zero-beta portfolio. Other models, such as the Fama and French (J Financ Econ 33:3–56, 1993) model, do not assign the correct value to the zero-beta rate.


Asset pricing models Two-pass cross-sectional regressions Zero-beta portfolio Misspecification-robust t-ratio 

JEL Classification

C10 G10 G12 



We thank the anonymous referee for detailed comments and suggestions that were very helpful in improving the paper.


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Copyright information

© Swiss Society for Financial Market Research 2014

Authors and Affiliations

  1. 1.ISG TunisUniversity of TunisTunisTunisia

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