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Cross‐Sectional Tests of Multifactor CCAPMs using Conditional Moments and Time‐Series Restrictions *
Author(s) -
Kim Jinyong
Publication year - 2009
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 1226-1165
DOI - 10.1111/j.2041-6156.2009.tb00027.x
Subject(s) - capital asset pricing model , econometrics , factor analysis , stock (firearms) , series (stratigraphy) , economics , consumption based capital asset pricing model , arbitrage pricing theory , consumption (sociology) , generalized method of moments , statistics , mathematics , engineering , mechanical engineering , paleontology , social science , sociology , biology , panel data
Two different methods are used to evaluate the performance of the consumption‐based asset pricing models to explain the cross‐section of expected stock returns in conditional moments: one is to scale the returns, and the other is to model time‐varying factor loadings, using instrument variables. Maximum correlation portfolios are constructed to directly impose restrictions on the time‐series intercepts, especially in a model whose factors are not returns. The empirical results are as follow: the consumption‐based models perform no better than the standard CAPM; adding the return on human capital as an additional risk factor does not help explain the cross‐section; and the Fama‐French three‐factor model shows the best ability to lower the pricing error.