Economics at your fingertips  

A Cross Section of Equity Returns: The No-Arbitrage Test

Pongrapeeporn Abhakorn (), Peter Smith () and Michael Wickens

Discussion Papers from Department of Economics, University of York

Abstract: We propose a new test based on the no-arbitrage condition that compares cross-sectional variation in equity returns to the cross-sectional variation in their conditional covariance with the discount factors. Using the multivariate generalized heteroskedasticity in mean model (MGM) to estimate the 25 portfolios formed on size and book-to-market ratio, together with each with its own arbitrage condition, we find that the no-arbitrage test rejects the consumption-based capital asset pricing model (C-CAPM). Although the conditional covariances of returns with consumption exhibit negative variation across size, they do not vary across the book-to-market ratio. Thus, the C-CAPM can capture size effect, but not value effect. Allowing the coefficients on the consumption covariances to be different largely improves the fit of the C-CAPM, however. The value effect appears to be associated with book-to-market ratio as well as size. Book-to-market ratio separately does not generate information about average returns that cannot be explained by the C-CAPM.

Keywords: Risk Premium; Equity Return; Stochastic Discount Factor; No-arbitrage Condition (search for similar items in EconPapers)
JEL-codes: C32 E44 G12 G14 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) Main text (application/pdf)

Related works:
Journal Article: Can stochastic discount factor models explain the cross-section of equity returns? (2016) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in Discussion Papers from Department of Economics, University of York Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom. Contact information at EDIRC.
Bibliographic data for series maintained by Paul Hodgson ().

Page updated 2023-01-24
Handle: RePEc:yor:yorken:11/23