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Asset Pricing, the Fama-French Factor Model and the Implications of Quantile Regression Analysis

Posted: 30 Aug 2009 Last revised: 30 Jun 2010

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); School of Business and Law, Edith Cowan University

Abhay Kumar-Singh

Edith Cowan University

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: August 27, 2009

Abstract

In traditional tests of asset pricing theory Ordinary Least Squares (OLS) regression methods are used in empirical tests of factor models, which implies a focus on the means of the distributions of covariates. The work of Koenker and Basset (1982) and Koenker (2005) provides an alternative via Quantile regression featuring inference about conditional quantile functions. This study empirically examines the behaviour of the three risk factors from Fama-French Three Factor model of stock returns, beyond the mean of the distribution, by using quantile regressions and a US data set. The study not only shows that the factor models does not necessarily follow a linear relationship but also shows that the traditional method of OLS become less effective when it comes to analysing the extremes within a distribution, which is often of key interest to investors and risk managers.

Keywords: Factor models, OLS, quantile regression

JEL Classification: G12, C21

Suggested Citation

Allen, David E. and Kumar-Singh, Abhay and Powell, Robert J., Asset Pricing, the Fama-French Factor Model and the Implications of Quantile Regression Analysis (August 27, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1462631

David Edmund Allen (Contact Author)

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Abhay Kumar-Singh

Edith Cowan University ( email )

Mount Lawley Campus
Perth
Churchlands 6018 WA
Australia

Robert J. Powell

Edith Cowan University - School of Accounting, Finance and Economics ( email )

Joondalup Campus
Perth
Joondalup 6027, WA
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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