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A generalized CAPM model with asymmetric power distributed errors with an application to portfolio construction

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  • Bao, Te
  • Diks, Cees
  • Li, Hao

Abstract

We estimate the CAPM model on European stock market data, allowing for asymmetric and fat-tailed return distributions using independent and identically asymmetric power distributed (IIAPD) innovations. The results indicate that the generalized CAPM with IIAPD errors has desirable properties. It is substantially less likely to be rejected than the traditional CAPM with normally distributed errors and, moreover, backtests show that portfolios constructed using IIAPD errors outperform the portfolio constructed with normally distributed errors in terms of commonly-used performance measures.

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  • Bao, Te & Diks, Cees & Li, Hao, 2018. "A generalized CAPM model with asymmetric power distributed errors with an application to portfolio construction," Economic Modelling, Elsevier, vol. 68(C), pages 611-621.
  • Handle: RePEc:eee:ecmode:v:68:y:2018:i:c:p:611-621
    DOI: 10.1016/j.econmod.2017.03.035
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    Cited by:

    1. Maciel, Leandro, 2021. "A new approach to portfolio management in the Brazilian equity market: Does assets efficiency level improve performance?," The Quarterly Review of Economics and Finance, Elsevier, vol. 81(C), pages 38-56.

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    More about this item

    Keywords

    CAPM; Non-Gaussian distribution; Asymmetric fat-tailed distributions; Minimum variance portfolio;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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