Iqbal, Javed and Brooks, Robert and Galagedera, Don UA (2007): Testing Asset Pricing Models in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor Models. Published in: Proceedings 12 Doctoral Reseach Conference, Faculty of Business and Economics Monash University , Vol. 12, (October 2007): pp. 109-120.
Download (133kB) | Preview
For emerging market returns there is strong evidence that the departure from normality is primarily driven by kurtosis and not skewness. This paper investigates the empirical validity of a return generating process that includes quadratic and cubic market returns as factors of pricing for an emerging market. Following Barone-Adesi et al. (2004) a multivariate test of a three-moment pricing model is developed. The empirical evidence in the market returns support the stylized facts typical for an emerging market and reveal that any return generating process that includes only a quadratic term (coskewness) may be misspecified. However comparison of higher order market return factors with Fama French factors indicates that while risk exposure to these higher order co-moments factors especially cokurtosis is important the co-moments do not possess sufficient explanatory power to render Fama French factor redundant.
|Item Type:||MPRA Paper|
|Original Title:||Testing Asset Pricing Models in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor Models|
|English Title:||Testing Asset Pricing Models in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor Models|
|Keywords:||Higher Order Co-Moments, Asset Pricing, Emerging Markets|
|Subjects:||G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates
G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets
|Depositing User:||Javed Iqbal|
|Date Deposited:||15. Sep 2010 11:58|
|Last Modified:||12. Feb 2013 05:03|
Aggarwal, R., Inclean, C., and Leal, R., 1999. Volatility in emerging stock markets. The Journal of Financial and Quantitative Analysis 34, 33-55.
Barone-Adesi, G., 1985. Arbitrage equilibrium with skewed asset returns. Journal of Financial and Quantitative Analysis 20, 299-313.
Barone Adesi, G., Gagliardini, P., and Urga, G., 2004. Testing asset pricing models with coskewness. Journal of Business and Economic Statistics 22, 474-485.
Brockett, P.L., and Kahaney, Y., 1992. Risk, return, skewness and preference. Management Science 38, 851-866.
Brooks, R.D. and Faff, R., 1998. A test of two-factor APT based on the quadratic market model: International evidence. Journal of Studies in Economics and Econometrics 22, 65-76.
Chen, N.-F., 1983. Some empirical tests of the theory of arbitrage pricing. The Journal of Finance 38, 1393-1414.
Chung, Y.P., Johnson, H., and Schill, M., 2006. Asset pricing when returns are nonnormal: Fama-French factors versus higher-order systematic co-moments. The Journal of Business 79, 923-940.
Dittmar, R., 2002. Nonlinear pricing kernals, kurtosis preference, and evidence from cross section of equity returns. Journal of Finance 57, 369-43.
Faff, R.W., 1992. A multivariate test of an equilibrium APT with time varying risk and risk premia in the Australian equity market. Australian Journal of Management 17, 233-258.
Fama, E., and French, K.R., 1992. The Cross-Section of Expected Stock Returns. Journal of Finance 48, 26-32.
Fama, E. and French, K.R., 1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3-56.
Gallant, A.R., 1987. Nonlinear statistical models, John Wiley New York.
Gibbons, M.R., 1982. Multivariate tests of financial models: A new approach. Journal of Financial Economics 10, 3-56.
Gibbons, M.R., Ross, S.A. and Shanken, J., 1989. Testing the efficiency of a given portfolio. Econometrica 57, 1121-1152.
Glahn, H., 1969. Some relationships derived from canonical correlation theory. Econometrica 37, 252-256.
Holmes, K. and Faff, R., 2004. Stability, asymmetry and seasonality of fund performance: An analysis of Australian multi-sector managed funds. Journal of Business Finance and Accounting 31, 539-578.
Hung, D.C., Shackleton, M., and Xu, X., 2004. CAPM, higher co-moment and factor models of UK stock returns. Journal of Business Finance and Accounting 31, 87-112.
Hwang, S., and Satchell, S.E., 1999. Modelling emerging market risk premia using higher moments. International Journal of Finance and Economics 4, 271-296.
Iqbal, J., and Brooks, R.D., 2007. Alternative beta risk estimators and asset pricing tests in emerging markets: the case of Pakistan. Journal of Multinational Financial Management 17, 75-93.
Jobson, J. and Korkie, B., 1982. Potential performance and tests of portfolio efficiency. Journal of Financial Economics 10, 433-466.
Kraus, A., Litzenberger, R., 1976. Skewness preference and the valuation of risk assets. Journal of Finance 31, 1085-1100.
Mittelhammer, R.C., Judge, G.C., Miller, D.J., 2000. Econometric Foundations, Cambridge University Press.
Ross, S.A., 1976. Arbitrage theory of capital asset pricing. Journal of Economic Theory 13, 341-360.
Scott, R., Horvath, P., 1980. On the direction of preference for moments of higher order than the variance. Journal of Finance 35, 915-919.
Srivastava, V.K., Giles, D.E., 1987. Seemingly unrelated regression equations models, Marcell Dekker Inc.