The CAPM may be true but can never be empirically tested

Evidence

There is one piece of empirical content” to the CAPM, says Roll, “which is that the true market portfolio should be on the efficient frontier [see chapter 2], if Sharpe’s ideas are right, and maybe it is, but we’ll never know that… We’ll never be able to measure it [the market portfolio] sufficiently when you think about all the stuff that’s missing. I mean certainly it’s not the American S&P 500. I mean that would be foolish to think that’s a proxy for the worldmarket portfolio, which includes human capital and real estate.” (Roll interview) Roll’s methodological critique was interpreted by some, just as Fama and French’s later empirical criticism was to be, as fatal blow to the Capital Asset Pricing Model. — Donald MacKenzie, An Engine, Not a Camera, 404

Categorization

• BMF: A theoretical model that may be correct yet is permanently immune to testing evokes the cosmic unknowability themes of 2001: A Space Odyssey, where ultimate truths remain beyond empirical reach.
• QUESTION: Worth chasing: the broader class of economic models that are falsifiable in principle but unmeasurable in practice due to proxy inadequacy.
• XREF: connects to: CAPM and market efficiency tests cannot be cleanly separated empirically. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 110; Empirical testing can only fail to disconfirm, never confirm, models like the CAPM — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 408; Roll challenged whether the CAPM could ever be tested at all — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 402 (+4 more)

Broader Connections

• Roll challenged whether the CAPM could ever be tested at all #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 402
• Empirical testing can only fail to disconfirm, never confirm, models like the CAPM #corroborates (0.90) — Donald MacKenzie, An Engine, Not a Camera, 408
• Regulatory use of CAPM could generate model-compliant returns but remains untested empirically #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1150
• CAPM adoption failed to improve the model’s fit to market data #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1147