Multifactor Expected-Returns Models and the Performance of Superstock Portfolios in the UK Equity Market

33 Pages Posted: 6 Mar 2008 Last revised: 26 Aug 2008

See all articles by Arief Daynes

Arief Daynes

University of Portsmouth - Business School

Panagiotis Andrikopoulos

Centre for Financial and Corporate Integrity (CFCI), Coventry University

Paraskevas Pagas

University of Portsmouth

Date Written: March 6, 2008

Abstract

Two empirically testable behavioural finance hypotheses are that (1) 'superstock' portfolios derived from multifactor expected-returns models will have higher than average returns and lower than average risk in terms of statistical and economic significance; and, (2) the expected-returns factor models will demonstrate greater predictive and explanatory power than the risk- and expected-returns-risk factor models of modern finance. Using a dataset comprised of the entire universe of fully-listed stocks in the UK market for the period 1987 to 2002 a multifactor expected-returns model is constructed to estimate security payoffs to factors related to various characteristics such as risk, price level, liquidity, growth potential and previous performance. These payoffs are then used to estimate out-of-sample expected returns and to construct a 'superstock' portfolio. Our analysis suggests that compared to the existing risk-factor models, an 'expected-returns' factor model exhibits increased predictive power of expected returns and has consistently higher than average realised returns with lower than average risk. These results are significant in both statistical and economic terms and corroborate the above behavioural finance hypotheses.

Keywords: Behavioural Finance, Multifactor Models, Superstocks, Expected-returns models

JEL Classification: G11, G12, G14

Suggested Citation

Daynes, Arief and Andrikopoulos, Panagiotis and Pagas, Paraskevas, Multifactor Expected-Returns Models and the Performance of Superstock Portfolios in the UK Equity Market (March 6, 2008). Available at SSRN: https://ssrn.com/abstract=1101830 or http://dx.doi.org/10.2139/ssrn.1101830

Arief Daynes

University of Portsmouth - Business School ( email )

Portsmouth, PO1 3DE
United Kingdom
+44 23 92844182 (Phone)
+44 23 92844037 (Fax)

HOME PAGE: http://www.port.ac.uk/departments/academic/ams/staff/title,1246,en.html

Panagiotis Andrikopoulos

Centre for Financial and Corporate Integrity (CFCI), Coventry University ( email )

Priory Street
Coventry, CV1 5FB
United Kingdom
+44(0)247 765 7920 (Phone)

Paraskevas Pagas (Contact Author)

University of Portsmouth ( email )

Department of Accounting and Finance
Portsmouth Business School
Portsmouth, Hants PO1 3DE
United Kingdom
+44(0)23 9284 4721 (Phone)
+44(0)23 9284 4037 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
304
Abstract Views
1,238
rank
100,184
PlumX Metrics