Return Predictability of Higher-Moment CAPM Market Models

Hung, C-H.

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.

Citation

Hung, C. (2008). Return Predictability of Higher-Moment CAPM Market Models. Journal of Business Finance and Accounting, 35(7-8), 998-1022. https://doi.org/10.1111/j.1468-5957.2008.02102.x

• Journal Article Type: Article
• Publication Date: Sep 30, 2008
• Deposit Date: May 22, 2009
• Journal: Journal of Business Finance and Accounting
• Print ISSN: 0306-686X
• Electronic ISSN: 1468-5957
• Publisher: Wiley
• Peer Reviewed: Peer Reviewed
• Volume: 35
• Issue: 7-8
• Pages: 998-1022
• DOI: https://doi.org/10.1111/j.1468-5957.2008.02102.x
• Keywords: Asset pricing, Higher-moment CAPM, Return predictability.
• Public URL: https://durham-repository.worktribe.com/output/1532126