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Functional Form, Skewness Effect, and the Risk-Return Relationship

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  • Lee, Cheng F.

Abstract

In this paper, possible factors affecting the second-pass regression results in capital asset pricing are investigated in detail. First, the true functional form used to test the risk-return relation is determined by using Box and Cox's [2] generalized functional form technique. Secondly, Box and Cox's residual analysis and transformation technique are used to show the importance of the skewness effect in capital asset pricing. Finally, some other factors affecting the results of second-pass regression coefficient in capital asset pricing also are explored. From these analyses, it is found that the functional form, the skewness effect, and the change of market condition are the most important factors in affecting the empirical conclusions in testing the bias of composite performance measures and the risk-return relation.

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  • Lee, Cheng F., 1977. "Functional Form, Skewness Effect, and the Risk-Return Relationship," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(1), pages 55-72, March.
  • Handle: RePEc:cup:jfinqa:v:12:y:1977:i:01:p:55-72_02
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    Cited by:

    1. Sudarsanam, P. S. & Taffler, R. J., 1995. "Financial ratio proportionality and inter-temporal stability: An empirical analysis," Journal of Banking & Finance, Elsevier, vol. 19(1), pages 45-60, April.
    2. Jitka Janová, 2012. "Crop planning optimization model: the validation and verification processes," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 20(3), pages 451-462, September.
    3. Eakins, Stanley G. & Stansell, Stanley R. & Below, Scott D., 1996. "The determinants of institutional demand for common stock: Tests of the capm vs. individual stock attributes," International Review of Financial Analysis, Elsevier, vol. 5(3), pages 237-257.
    4. Yi-Cheng Shih & Sheng-Syan Chen & Cheng-Few Lee & Po-Jung Chen, 2014. "The evolution of capital asset pricing models," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 415-448, April.
    5. Chaudhury, M. M. & Lee, C. F., 1997. "Functional form of stock return model: Some international evidence," The Quarterly Review of Economics and Finance, Elsevier, vol. 37(1), pages 151-183.
    6. Attiya Y. Javid & Eatzaz Ahmad, 2008. "Test of Multi-moment Capital Asset Pricing Model: Evidence from Karachi Stock Exchange," PIDE-Working Papers 2008:49, Pakistan Institute of Development Economics.
    7. Tamara Teplova & Evgeniya Shutova, 2011. "A Higher Moment Downside Framework for Conditional and Unconditional Capm in the Russian Stock Market," Eurasian Economic Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 157-178, December.
    8. Gourieroux, C. & Monfort, A., 2005. "The econometrics of efficient portfolios," Journal of Empirical Finance, Elsevier, vol. 12(1), pages 1-41, January.
    9. Elton, Edwin J. & Gruber, Martin J., 1997. "Modern portfolio theory, 1950 to date," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1743-1759, December.
    10. Javid, Attiya Yasmin, 2009. "Test of Higher Moment Capital Asset Pricing Model in Case of Pakistani Equity Market," MPRA Paper 38059, University Library of Munich, Germany.

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