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Return Predictability of Higher‐Moment CAPM Market Models
Author(s) -
Hung ChiHsiou
Publication year - 2008
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2008.02102.x
Subject(s) - predictability , capital asset pricing model , econometrics , economics , moment (physics) , momentum (technical analysis) , multicollinearity , financial economics , mathematics , statistics , regression analysis , physics , classical mechanics
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.