Asset Attribution Stability And Portfolio Construction:  An Educational Example

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)

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Test of CAPM: A Study of India and US

GIS Business ◽

10.26643/gis.v11i5.3422 ◽

2016 ◽

Vol 11 (5) ◽

pp. 51-58

Author(s):

Pankaj Chaudhary

Keyword(s):

Asset Pricing ◽

Capital Asset Pricing ◽

Regression Equations ◽

Long Distance ◽

Cross Sectional ◽

Risk Return ◽

Research Areas ◽

Asset Pricing Models ◽

Using Data ◽

Capm Model

Asset pricing is one of the most important research areas in the field of finance. The simple CAPM model (capital asset pricing model) relates the return of the stocks and portfolios to the market factor captured by beta. Since the formulation of CAPM in 1960s, asset pricing has covered a long distance. We conduct the test of CAPM for India and US by using data from January 2001 to December 2015. We run 84 second pass cross-sectional regression equations to test the applicability of CAPM. The results of our test find that CAPM is not able to capture the cross section of average returns both in India and US and we should consider the alternative asset pricing models to establish the risk-return relationship.

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

Brazilian Review of Finance ◽

10.12660/rbfin.v9n3.2011.2862 ◽

2011 ◽

Vol 9 (3) ◽

pp. 383 ◽

Cited By ~ 1

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.

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Test of CAPM: A Study of India and US

International Journal of Financial Management ◽

10.21863/ijfm/2016.6.2.032 ◽

2016 ◽

Vol 6 (2) ◽

Author(s):

Pankaj Chaudhary

Keyword(s):

Asset Pricing ◽

Capital Asset Pricing ◽

Regression Equations ◽

Long Distance ◽

Cross Sectional ◽

Risk Return ◽

Research Areas ◽

Asset Pricing Models ◽

Using Data ◽

Capm Model

Asset pricing is one of the most important research areas in the field of finance. The simple CAPM model (capital asset pricing model) relates the return of the stocks and portfolios to the market factor captured by beta. Since the formulation of CAPM in 1960s, asset pricing has covered a long distance. We conduct the test of CAPM for India and US by using data from January 2001 to December 2015. We run 84 second pass cross-sectional regression equations to test the applicability of CAPM. The results of our test find that CAPM is not able to capture the cross section of average returns both in India and US and we should consider the alternative asset pricing models to establish the risk-return relationship.

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Tests of Alternative Asset Pricing Models Using Individual Security Returns and a New Multivariate F-Test

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091519500012 ◽

2019 ◽

Vol 22 (01) ◽

pp. 1950001

Author(s):

Shafiqur Rahman ◽

Matthew J. Schneider

Keyword(s):

Asset Pricing ◽

Factor Model ◽

Relative Performance ◽

Pricing Models ◽

Multivariate Test ◽

Portfolio Returns ◽

Asset Pricing Models ◽

Security Returns ◽

Stock Information ◽

Individual Security

This paper examines relative performance of alternative asset pricing models using individual security returns. The standard multivariate test used in studies comparing the performance of asset pricing models requires the number of stocks to be less than the number of time series observations, which requires grouping stocks into portfolios. This results in a loss of disaggregate stock information. We apply a different statistical test to overcome this problem and to investigate relative performance of alternative asset pricing models using individual security returns instead of portfolio returns. Our findings suggest that a parsimonious six-factor model that includes the momentum and orthogonal value factors outperforms all other models based on a number of measures as well as the average [Formula: see text]-test. Unlike the standard multivariate test, we find that the average [Formula: see text]-test has superior power to discriminate among competing models and does not reject all tested models.

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