Arbitrage Portfolios

2020 ◽  
Author(s):  
Soohun Kim ◽  
Robert A Korajczyk ◽  
Andreas Neuhierl
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Predictive Power ◽  
Abnormal Returns ◽  
Firm Characteristics ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
Maximal Weight ◽  
Large Panel ◽  
Sharpe Ratios

Abstract We propose a new methodology for forming arbitrage portfolios that utilizes the information contained in firm characteristics for both abnormal returns and factor loadings. The methodology gives maximal weight to risk-based interpretations of characteristics’ predictive power before any attribution is made to abnormal returns. We apply the methodology to simulated economies and to a large panel of U.S. stock returns. The methodology works well in our simulation and when applied to stocks. Empirically, we find the arbitrage portfolio has (statistically and economically) significant alphas relative to several popular asset pricing models and annualized Sharpe ratios ranging from 1.31 to 1.66.

Firm Characteristics, Cross-Sectional Regression Estimates, and Asset Pricing Tests

2019 ◽  
Vol 10 (2) ◽  
pp. 290-334 ◽  
Author(s):  
Chris Kirby
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Nonlinear Effects ◽  
Firm Characteristics ◽  
Pricing Models ◽  
Cross Sectional ◽  
Portfolio Returns ◽  
Asset Pricing Models ◽  
Formidable Challenge ◽  
Expected Stock Returns

Abstract I test a number of well-known asset pricing models using regression-based managed portfolios that capture nonlinearity in the cross-sectional relation between firm characteristics and expected stock returns. Although the average portfolio returns point to substantial nonlinearity in the data, none of the asset pricing models successfully explain the estimated nonlinear effects. Indeed, the estimated expected returns produced by the models display almost no variation across portfolios. Because the tests soundly reject every model considered, it is apparent that nonlinearity in the relation between firm characteristics and expected stock returns poses a formidable challenge to asset pricing theory. (JEL G12, C58)

A Transaction-Cost Perspective on the Multitude of Firm Characteristics

2020 ◽  
Vol 33 (5) ◽  
pp. 2180-2222 ◽  
Author(s):  
Victor DeMiguel ◽  
Alberto Martín-Utrera ◽  
Francisco J Nogales ◽  
Raman Uppal
Keyword(s):  
Transaction Costs ◽  
Stock Returns ◽  
Firm Characteristics ◽  
Pricing Models ◽  
Oxford University ◽  
Asset Pricing Models ◽  
Economic Rationale ◽  
Underlying Stocks ◽  
Different Characteristics ◽  
Published Paper

Abstract We investigate how transaction costs change the number of characteristics that are jointly significant for an investor’s optimal portfolio and, hence, how they change the dimension of the cross-section of stock returns. We find that transaction costs increase the number of significant characteristics from 6 to 15. The explanation is that, as we show theoretically and empirically, combining characteristics reduces transaction costs because the trades in the underlying stocks required to rebalance different characteristics often cancel out. Thus, transaction costs provide an economic rationale for considering a larger number of characteristics than that in prominent asset-pricing models. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

scholarly journals Optimisation of Time-Varying Asset Pricing Models with Penetration of Value at Risk and Expected Shortfall

Mathematics ◽  
2021 ◽  
Vol 9 (4) ◽  
pp. 394
Author(s):  
Adeel Nasir ◽  
Kanwal Iqbal Khan ◽  
Mário Nuno Mata ◽  
Pedro Neves Mata ◽  
Jéssica Nunes Martins
Keyword(s):  
At Risk ◽  
Asset Pricing ◽  
Stock Returns ◽  
Value At Risk ◽  
Expected Shortfall ◽  
Time Varying ◽  
Pricing Models ◽  
Asset Pricing Model ◽  
Asset Pricing Models ◽  
Market Beta

This study aims to apply value at risk (VaR) and expected shortfall (ES) as time-varying systematic and idiosyncratic risk factors to address the downside risk anomaly of various asset pricing models currently existing in the Pakistan stock exchange. The study analyses the significance of high minus low VaR and ES portfolios as a systematic risk factor in one factor, three-factor, and five-factor asset pricing model. Furthermore, the study introduced the six-factor model, deploying VaR and ES as the idiosyncratic risk factor. The theoretical and empirical alteration of traditional asset pricing models is the study’s contributions. This study reported a strong positive relationship of traditional market beta, value at risk, and expected shortfall. Market beta pertains its superiority in estimating the time-varying stock returns. Furthermore, value at risk and expected shortfall strengthen the effects of traditional beta impact on stock returns, signifying the proposed six-factor asset pricing model. Investment and profitability factors are redundant in conventional asset pricing models.

scholarly journals Modelos de Precificação de Ativos e o Efeito Liquidez: Evidências Empíricas no Mercado Acionário Brasileiro

2011 ◽  
Vol 9 (3) ◽  
pp. 383 ◽  
Author(s):  
Márcio André Veras Machado ◽  
Otávio Ribeiro de Medeiros
Keyword(s):  
Asset Pricing ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Explanatory Power ◽  
Liquidity Premium ◽  
Pricing Models ◽  
Portfolio Returns ◽  
Asset Pricing Models ◽  
Three Factor

This paper is aims to analyze whether a liquidity premium exists in the Brazilian stock market. As a second goal, we include liquidity as an extra risk factor in asset pricing models and test whether this factor is priced and whether stock returns were explained not only by systematic risk, as proposed by the CAPM, by Fama and French’s (1993) three-factor model, and by Carhart’s (1997) momentum-factor model, but also by liquidity, as suggested by Amihud and Mendelson (1986). To achieve this, we used stock portfolios and five measures of liquidity. Among the asset pricing models tested, the CAPM was the least capable of explaining returns. We found that the inclusion of size and book-to-market factors in the CAPM, a momentum factor in the three-factor model, and a liquidity factor in the four-factor model improve their explanatory power of portfolio returns. In addition, we found that the five-factor model is marginally superior to the other asset pricing models tested.

scholarly journals Applicability of Investment and Profitability Effects in Asset Pricing Models

2017 ◽  
Vol 21 (6) ◽  
pp. 851-874 ◽  
Author(s):  
Márcio André Veras Machado ◽  
Robert Faff ◽  
Suelle Cariele de Souza e Silva
Keyword(s):  
Asset Pricing ◽  
Stock Market ◽  
Stock Returns ◽  
Factor Model ◽  
Five Factor Model ◽  
Poor Performance ◽  
Pricing Models ◽  
Asset Pricing Models ◽  
The Poor ◽  
Fama And French

Abstract This study aims to investigate whether investment and profitability are priced and if they partially explain the variations of stock returns in the Brazilian stock market, according to the Fama and French's (2015) five-factor model. By using time series and cross-section regression, we found that book-to-market, momentum and liquidity are associated with stock returns whereas investment and profitability were not significant. We also found that there is no investment premium in Brazil. Therefore, motivated by the importance of B/M, momentum and liquidity to the Brazilian stock market, as well as by the poor performance of profitability and investment, we document that Keene and Peterson's (2007) five-factor model is superior to all other models, especially the five-factor model by Fama and French (2015).

scholarly journals Neoclassical Asset Pricing Tests in Sri Lanka: A Structural Empirical Review

2020 ◽  
Vol 12 (2) ◽  
pp. 39
Author(s):  
Neelangie Sulochana Nanayakkara ◽  
P. D. Nimal ◽  
Y. K. Weerakoon
Keyword(s):  
Asset Pricing ◽  
Sri Lanka ◽  
Stock Returns ◽  
Pricing Models ◽  
Cross Sectional ◽  
Holistic View ◽  
Asset Pricing Models ◽  
Fama And French ◽  
The Impact ◽  
Empirical Investigations

Neoclassical asset pricing models try to explain cross sectional variation in stock returns. This study critically reviews the findings of empirical investigations on neoclassical asset pricing models in the Colombo Stock Exchange (CSE), Sri Lanka. The study uses the structural empirical review (SER) methodology to capture a holistic view of empirical investigations carried out in the CSE from the year 1997 to 2017.The pioneering Capital Asset Pricing Model (CAPM) (Sharpe, 1964; Lintner, 1965: Black, 1972) (SLB) states that market betas of stocks are sufficient to explain the cross sectional variation of stock returns. Alternatively there are multifactor models (Ross, 1976; Chen, 1986; Fama and French, 1993, 2015; Cahart, 1997) that state stock returns are driven by multiple risk factors. Similar to other markets the findings on the SLB model are not consistent in the CSE. The Fama and French (1993) and the Cahart (1997) models are supported in the CSE which is consistent with other markets, but the explanatory powers of them are substantially low in the Sri Lankan context. Contrasting the findings of a significant impact of macroeconomic factors on stock returns in developed markets, the impact of them in the CSE are temporary.The overall findings of the applicability of neoclassical asset pricing models in the CSE are inconsistent and inconclusive and the study identifies two reasons that may have contributed to such results. Firstly, it recognises that the inherent limitations of neoclassical asset pricing models may have affected the findings in the CSE. Secondly, it supports the argument that neoclassical models, as they are may not be applicable in emerging or frontier markets, thus they may need to be augmented with characteristics of such markets to make them more applicable.

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