Further Tests of the ZCAPM Asset Pricing Model

James W. Kolari, Jianhua Z. Huang, Wei Liu and Huiling Liao
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James W. Kolari: Department of Finance, Texas A&M University, College Station, TX 77843, USA
Jianhua Z. Huang: Department of Statistics, Texas A&M University, College Station, TX 77843, USA
Wei Liu: USAA Bank, San Antonio, TX 78288, USA
Huiling Liao: Department of Statistics, Texas A&M University, College Station, TX 77843, USA

JRFM, 2022, vol. 15, issue 3, 1-23

Abstract: In a recent book, Kolari et al. developed a new theoretical capital asset pricing model dubbed the ZCAPM . Based on out-of-sample cross-sectional tests using U.S. stocks, the ZCAPM consistently outperformed well-known multifactor models popular in the finance literature. This paper presents further evidence that expands their sample period from 1927 to 2020. Results are provided for the subperiods 1927 to 1964 and 1965 to 2020. Our results corroborate those of KLH. In cross-sectional tests, the ZCAPM outperforms the CAPM as well as the Fama and French three-factor model and Carhart four-factor model. Outperformance is found in terms of both higher goodness of fit and the statistical significance of factor loadings. Interestingly, the earlier subperiod results highlight problems with the endogeneity of test assets in cross-sectional tests of multifactor models.

Keywords: asset pricing; zero-beta CAPM; return dispersion; expectation-maximization (EM) regression; latent variable (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2022
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