A generalized CAPM model with asymmetric power distributed errors with an application to portfolio construction

Te Bao, Cees Diks and Hao Li

Economic Modelling, 2018, vol. 68, issue C, 611-621

Abstract: We estimate the CAPM model on European stock market data, allowing for asymmetric and fat-tailed return distributions using independent and identically asymmetric power distributed (IIAPD) innovations. The results indicate that the generalized CAPM with IIAPD errors has desirable properties. It is substantially less likely to be rejected than the traditional CAPM with normally distributed errors and, moreover, backtests show that portfolios constructed using IIAPD errors outperform the portfolio constructed with normally distributed errors in terms of commonly-used performance measures.

Keywords: CAPM; Non-Gaussian distribution; Asymmetric fat-tailed distributions; Minimum variance portfolio (search for similar items in EconPapers)
JEL-codes: C12 C14 C22 C52 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:68:y:2018:i:c:p:611-621

DOI: 10.1016/j.econmod.2017.03.035

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