Return Explanatory Ability and Predictability of Non-Linear Market Models

43 Pages Posted: 13 Aug 2007

See all articles by Chi-Hsiou Daniel Hung

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

Abstract

Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.

Keywords: Asset Pricing, Non-Linearity, Return Predictability

JEL Classification: G11, G12, G15

Suggested Citation

Hung, Chi-Hsiou Daniel, Return Explanatory Ability and Predictability of Non-Linear Market Models. Durham Business School Working Paper No. 108, Available at SSRN: https://ssrn.com/abstract=1005138 or http://dx.doi.org/10.2139/ssrn.1005138

Chi-Hsiou Daniel Hung (Contact Author)

University of Glasgow - Adam Smith Business School ( email )

Gilbert Scott Building
University of Glasgow
Glasgow, Scotland G12 8QQ
United Kingdom

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