Title: On the existence of a risk free asset: The first empirical test of zero-beta CAPM using T-bills and gold
Authors: Zhen He - University of York (United Kingdom) [presenting]
Jacco Thijssen - University of York (United Kingdom)
Fergal OConnor - University of York (United Kingdom)
Abstract: The aim is to test by the first time whether government Treasury bill (T-bill) or gold can be a proper risk-free asset in the zero-beta Capital Asset Pricing Model (CAPM). We start with the CAPM to test gold as a zero-beta asset. However, the results of statistical power of the CAPM regression show that CAPM is not consistently a sufficient method. Then we follow the hypothesis of the zero-beta asset in the zero-beta CAPM. Wald test and Likelihood ratio test are applied in the zero-beta CAPM to investigate whether T-bill or gold is a zero-beta asset. This is the first empirical test of zero-beta asset in zero-beta CAPM. This approach allows the data to examine if T-bill or gold is a zero-beta asset, rather than arbitrarily setting T-bill as the zero-beta asset and further as the risk-free asset. Due to the results of Wald test in zero-beta CAPM, we find that neither the T-bill nor gold is a zero-beta asset, let alone risk-free asset. This provides the evidence that there is no existence of the risk-free asset, and that the assumption of classic CAPM does not hold.