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Tests of the Relations among Marketwide Factors, Firm-Specific Variables, and Stock Returns Using a Conditional Asset Pricing Model

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  • He, Jia, et al

Abstract

In this article, the authors generalize C. Harvey's (1989) empirical specification of conditional asset pricing models to allow for both time-varying covariances between stock returns and marketwide factors and time-varying reward-to-covariabilities. The model is then applied to examine the effects of firm size and book-to-market equity ratios. The authors find that the traditional asset pricing model with commonly used factors can only explain a small portion of the stock returns predicted by firm size and book-to-market equity ratios. The results indicate that allowing time-varying covariances and time-varying reward-to-covariabilities does little to salvage the traditional asset pricing models. Coauthors are Raymond Kan, Lilian Ng, and Chu Zhang. Copyright 1996 by American Finance Association.

Suggested Citation

  • He, Jia, et al, 1996. " Tests of the Relations among Marketwide Factors, Firm-Specific Variables, and Stock Returns Using a Conditional Asset Pricing Model," Journal of Finance, American Finance Association, vol. 51(5), pages 1891-1908, December.
  • Handle: RePEc:bla:jfinan:v:51:y:1996:i:5:p:1891-1908
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    Cited by:

    1. Li, Yan & Yang, Liyan, 2011. "Testing conditional factor models: A nonparametric approach," Journal of Empirical Finance, Elsevier, vol. 18(5), pages 972-992.
    2. Patrick Coggi & Bogdan Manescu, 2004. "A multifactor model of stock returns with endogenous regime switching," University of St. Gallen Department of Economics working paper series 2004 2004-01, Department of Economics, University of St. Gallen.
    3. Lucas, Andre & van Dijk, Ronald & Kloek, Teun, 2002. "Stock selection, style rotation, and risk," Journal of Empirical Finance, Elsevier, vol. 9(1), pages 1-34, January.
    4. Yuming Li, 1998. "Time Variations In Risk Premia, Volatility, And Reward-To-Volatility," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 21(4), pages 431-446, December.
    5. Li, Yuming, 2001. "Expected Returns and Habit Persistence," Review of Financial Studies, Society for Financial Studies, vol. 14(3), pages 861-899.
    6. Simin, Timothy, 2008. "The Poor Predictive Performance of Asset Pricing Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(02), pages 355-380, June.
    7. Han, Yufeng, 2012. "State uncertainty in stock markets: How big is the impact on the cost of equity?," Journal of Banking & Finance, Elsevier, vol. 36(9), pages 2575-2592.

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