Return Predictability of Higher-Moment CAPM Market Models

25 Pages Posted: 2 Oct 2008

See all articles by Chi-Hsiou Daniel Hung

Chi-Hsiou Daniel Hung

University of Glasgow - Adam Smith Business School

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Date Written: 2008-02

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 for tackling multicollinearity confirms the findings. Parameter uncertainty, however, impinges on forecast accuracy and hence hampers the predictive ability of the higher-moment models.

Suggested Citation

Hung, Chi-Hsiou Daniel, Return Predictability of Higher-Moment CAPM Market Models (2008-02). Journal of Business Finance & Accounting, Vol. 35, Issue 7-8, pp. 998-1022, September/October 2008, Available at SSRN: https://ssrn.com/abstract=1276760 or http://dx.doi.org/10.1111/j.1468-5957.2008.02102.x

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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