Tests of Alternative Asset Pricing Models Using Individual Security Returns and a New Multivariate F-Test

Shafiqur Rahman and Matthew J. Schneider ()
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Shafiqur Rahman: Rubicon Global Advisors, Portland, Oregon, USA
Matthew J. Schneider: LeBow College of Business, Drexel University, Philadelphia, Pennsylvania, USA

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2019, vol. 22, issue 01, 1-34

Abstract: This paper examines relative performance of alternative asset pricing models using individual security returns. The standard multivariate test used in studies comparing the performance of asset pricing models requires the number of stocks to be less than the number of time series observations, which requires grouping stocks into portfolios. This results in a loss of disaggregate stock information. We apply a different statistical test to overcome this problem and to investigate relative performance of alternative asset pricing models using individual security returns instead of portfolio returns. Our findings suggest that a parsimonious six-factor model that includes the momentum and orthogonal value factors outperforms all other models based on a number of measures as well as the average F-test. Unlike the standard multivariate test, we find that the average F-test has superior power to discriminate among competing models and does not reject all tested models.

Keywords: Asset pricing; factor models; market portfolio; size; book-to-market; momentum; investment; profitability; liquidity risk; multivariate F-test (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219091519500012

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