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Non-parametric and semi-parametric asset pricing

Author

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  • Erdos, Péter
  • Ormos, Mihály
  • Zibriczky, Dávid

Abstract

We find that the CAPM fails to explain the small firm effect even if its non-parametric form is used which allows time-varying risk and non-linearity in the pricing function. Furthermore, the linearity of the CAPM can be rejected, thus the widely used risk and performance measures, the beta and the alpha, are biased and inconsistent. We deduce semi-parametric measures which are non-constant under extreme market conditions in a single factor setting; on the other hand, they are not significantly different from the linear estimates of the Fama-French three-factor model. If we extend the single factor model with the Fama-French factors, the simple linear model is able to explain the US stock returns correctly.

Suggested Citation

  • Erdos, Péter & Ormos, Mihály & Zibriczky, Dávid, 2011. "Non-parametric and semi-parametric asset pricing," Economic Modelling, Elsevier, vol. 28(3), pages 1150-1162, May.
  • Handle: RePEc:eee:ecmode:v:28:y:2011:i:3:p:1150-1162
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    1. repec:kap:empiri:v:44:y:2017:i:3:d:10.1007_s10663-016-9329-3 is not listed on IDEAS
    2. Gómez-González, José Eduardo & Sanabria-Buenaventura, Elioth Mirsha, 2014. "Non-parametric and semi-parametric asset pricing: An application to the Colombian stock exchange," Economic Systems, Elsevier, vol. 38(2), pages 261-268.
    3. Ormos, Mihály & Timotity, Dusán, 2016. "Generalized asset pricing: Expected Downside Risk-based equilibrium modeling," Economic Modelling, Elsevier, vol. 52(PB), pages 967-980.
    4. Mihaly Ormos & David Zibriczky, 2015. "Entropy-Based Financial Asset Pricing," Papers 1501.01155, arXiv.org.

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