Return Predictability of Higher-Moment CAPM Market Models

38 Pages Posted: 5 Jun 2007 Last revised: 12 Mar 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: January 2008

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

Keywords: Asset Pricing, Higher-Moment CAPM, Return Predictability

JEL Classification: G11, G12, G15

Suggested Citation

Hung, Chi-Hsiou Daniel, Return Predictability of Higher-Moment CAPM Market Models (January 2008). Available at SSRN: https://ssrn.com/abstract=991324 or http://dx.doi.org/10.2139/ssrn.991324

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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