Homogeneity Hypothesis in the Context of Asset Pricing Models: The Quadratic Market Model

Abstract

This paper proposes a two factor model for asset pricing. We formulate a model of asset returns that in addition to the traditional market return term includes also the square of the market return to account for risk originating from coskewness with the market portofolio. The quadratic term is able to account for heterogeneities across portfolios. We conclude that the extra term is significant and that the homogeneity hypothesis is accepted only in the presence of this term.

Keywords: Asset pricing models, panel

JEL Classification: G12, C23