Suppose we have the following two versions of the market model, which shows the relationship between the rate of return on a stock and the rate of return on some market index:

(a) Suppose the quadratic market model is the correct form to estimate but we estimate the standard market model instead. What is the effect on our parameter estimates?

(b) Suppose the standard market model is the correct form to estimate but we estimate the quadratic market model instead. What is the effect on our parameter estimates?

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Standard market model: Ri,t = x + BRm,t + ei,t Quadratic market model: R = a + BRmt + Rm,t + lis