Return Explanatory Ability and Predictability of Non-Linear Market Models

Chi-Hsiou Hung ()

No 2007_05, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period- ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.

Keywords: Asset Pricing; Non-Linearity; Return Predictability (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2007-03-20
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