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Return explanatory ability and predictability of non-linear market models.

Hung, D. C. (2007) 'Return explanatory ability and predictability of non-linear market models.', Working Paper. Durham Business School, Durham.


Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.

Item Type:Monograph (Working Paper)
Keywords:Asset pricing, Non-linearity, Return predictability.
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Record Created:09 Mar 2009
Last Modified:16 Oct 2013 13:20

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