Return Predictability of Higher-Moment CAPM Market Models
38 Pages Posted: 5 Jun 2007 Last revised: 12 Mar 2008
Date Written: January 2008
Abstract
This paper examines the relative performance of the higher-moment CAPM market models and the CAPM in explaining realised returns and predicting one-period-ahead returns on individual stocks and (both equally- and value-weighted) portfolios of momentum, size and country sorts. The three-moment CAPM, the quadratic-marke model, provides the best ex post estimates in respect of the time-variation in returns on both the return winner and the smallest size portfolios. Further analysis using an orthogonal factor model in tackling multicollinearity confirms the findings. Parameter uncertainty, however, impinges on forecast accuracy and hence hampers the predictive ability of the higher-moment models.
Keywords: Asset Pricing, Higher-Moment CAPM, Return Predictability
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Asset Pricing When Returns are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments
By Y. Peter Chung, Herb Johnson, ...
-
Asset Pricing When Returns are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments
By Y. Peter Chung, Herb Johnson, ...
-
Conditional Asset Pricing and Momentum
By Thanh Huynh and Daniel R. Smith
-
Time-Varying Conditional Skewness and the Market Risk Premium
-
CAPM, Higher Co-Moment and Factor Models of UK Stock Returns
By Chi-hsiou Daniel Hung, Mark B. Shackleton, ...
-
How to Price Hedge Funds: From Two- to Four-Moment CAPM
By Angelo Ranaldo and Laurent Favre
-
Homogeneity Hypothesis in the Context of Asset Pricing Models: The Quadratic Market Model
By Giovanni Barone-adesi, Patrick Gagliardini, ...
-
A Three-Moment International Asset-Pricing Model: Theory and Evidence
By Vihang R. Errunza and Oumar Sy