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

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  • Javed Iqbal
  • Robert Brooks
  • Don Galagedera

Abstract

The finite sample performance of the Wald, Generalized Method of Moment (GMM) and Likelihood Ratio (LR) tests of multivariate asset pricing tests have been investigated in several studies on the US financial markets. This article extends this analysis in two important ways. Firstly, considering the fact that the Wald test is not invariant to alternative nonlinear formulation of the null hypothesis the article investigates whether alternative forms of the Wald and GMM tests result in considerable difference in size and power. Secondly, the article 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. A multiplicative form 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.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

Volume (Year): 20 (2010)
Issue (Month): 5 ()
Pages: 381-395

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Handle: RePEc:taf:apfiec:v:20:y:2010:i:5:p:381-395

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Cited by:
  1. Tanya Ara\'ujo & Jo\~ao Dias & Samuel Eleut\'erio & Francisco Lou\c{c}\~a, 2012. "How Fama Went Wrong: Measures of Multivariate Kurtosis for the Identification of the Dynamics of a N-Dimensional Market," Papers 1207.1202, arXiv.org.
  2. Araújo, Tanya & Dias, João & Eleutério, Samuel & Louçã, Francisco, 2013. "A measure of multivariate kurtosis for the identification of the dynamics of a N-dimensional market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3708-3714.
  3. Tanya Araujo & João Dias & Samuel Eleutério & Francisco Louçã, 2012. "How Fama Went Wrong: Measures of Multivariate Kurtosis for the Identification of the Dynamics of a N-Dimensional Market," Working Papers Department of Economics 2012/21, ISEG - School of Economics and Management, Department of Economics, University of Lisbon.
  4. Iqbal, Javed & Brooks, Robert & Galagedera, Don U.A., 2010. "Testing conditional asset pricing models: An emerging market perspective," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 897-918, September.

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