A Comparative Evaluation of Capital Asset Pricing Models: A Tobin Minimum Required Rate of Return and Inflation-Based Approach
Keywords:
Tobin’s Minimum Required Rate of Return, Inflation, Systematic Risk, Downside Risk, LiquidityAbstract
This study aims to evaluate the effectiveness of replacing the conventional risk-free rate with Tobin’s Minimum Required Rate of Return (TMRR) in asset pricing models and to assess its impact on estimating expected stock returns in the Iranian capital market. This applied study adopts a descriptive-analytical and ex post facto design using monthly panel data from 28 leading firms listed on the Tehran Stock Exchange over the period 2011–2023. Four asset pricing frameworks—Classical CAPM, Downside CAPM, Liquidity-Adjusted CAPM, and Inflation-Adjusted CAPM—were estimated in both traditional and TMRR-based forms. Data stationarity was tested using the Levin–Lin–Chu test, while F-Limer and Hausman tests determined the appropriate panel structure. Model estimations were conducted using the GLS method in EViews software. The results indicate that substituting the traditional risk-free rate with TMRR significantly reduces estimated systematic risk, substantially improves the explanatory power of the models, and enhances the statistical stability of beta coefficients. The coefficient of determination increased markedly across all models, particularly in CAPM, Downside CAPM, and Liquidity-Adjusted CAPM. Moreover, the findings reveal a nonlinear relationship between inflation and the equity risk premium, with TMRR-based models demonstrating superior adaptability under inflationary conditions. Overall, employing Tobin’s Minimum Required Rate of Return provides a more realistic and endogenous benchmark for asset pricing in volatile and inflationary economies and offers an effective framework for localizing and improving the empirical performance of CAPM-type models.
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