Return Predictability of Higher-Moment CAPM Market Models
38 Pages Posted: 5 Jun 2007 Last revised: 12 Mar 2008
Date Written: January 2008
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: Suggested Citation