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Multivariate tests of asset pricing: Simulation evidence from an emerging market

Javed Iqbal, Robert Brooks and Don Galagedera

No 2/08, Monash Econometrics and Business Statistics Working Papers from Monash University, Department of Econometrics and Business Statistics

Abstract: The finite sample performance of the Wald, GMM and Likelihood Ratio (LR) tests of multivariate asset pricing tests have been investigated in several studies on the US financial markets. This paper extends this analysis in two important ways. Firstly, considering the fact that the Wald test is not invariant to alternative non-linear formulation of the null hypothesis the paper investigates whether alternative forms of the Wald and GMM tests result in considerable difference in size and power. Secondly, the paper extends the analysis to the emerging market data. Emerging markets provide an interesting practical laboratory to test asset pricing models. The characteristics of emerging markets are different from the well developed markets of US, Japan and Europe. It is found that the asymptotic Wald and GMM tests based on Chi-Square critical values result in considerable size distortions. The bootstrap tests yield the correct sizes. Multiplicative from of bootstrap GMM test appears to outperform the LR test when the returns deviate from normality and when the deviations from the asset pricing model are smaller. Application of the bootstrap tests to the data from the Karachi Stock Exchange strongly supports the zero-beta CAPM. However the low power of the multivariate tests warrants a careful interpretation of the results.

Keywords: Zero-beta CAPM; Multivariate Test; Wald; LR; Emerging Markets (search for similar items in EconPapers)
Pages: 33 pages
Date: 2008-04
New Economics Papers: this item is included in nep-ecm and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Journal Article: Multivariate tests of asset pricing: simulation evidence from an emerging market (2010) Downloads
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