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On the Dynamic Specification of International Asset Pricing Models

Listed author(s):
  • René Garcia
  • Eric Ghysels
  • Maral Kichian

In this paper, we test the international conditional CAPM model of Dumas and Solnik (1993) and the international conditional APT model of Ferson and Harvey (1992), as well as various extensions of these models. These models were typically estimated by GMM and found to be valid according to the standard J-test. Given to the low power of J-tests against many specific alternatives, we propose several diagnostics to further scrutinize the empirical fit of these models. We show that although they could not be rejected on the basis of the overidentifying restrictions test, they are not very useful for consistently predicting the conditional first and second moments of equity and foreign exchange returns over time. Our specification search leads us to an alternative international conditional CAPM model with a factor ARCH formulation for modelling international returns for which we find strong support, both with the J-statistic criterion, as well as a number of other diagnostics tests, including tests for parameter stability, orthogonality of residuals and explicit analysis of pricing errors. Dans ce papier, nous testons le modèle CAPM conditionnel international de Dumas et Solnik, l'APT conditionnel international de Ferson et Harvey, ainsi que plusieurs extensions de ces modèles. Ceux-ci ont habituellement été estimés par la méthode des moments généralisés et un test J standard n'a souvent pas permis de rejeter les spécifications retenues. Cependant, étant donnée la faible puissance de ces tests contre certaines alternatives locales, nous proposons d'autres tests de diagnostique pour approfondir l'examun empirique de ces modèles. Nous montrons que même si ces derniers n'ont pas été rejeté par le test J , ils ne sont pas très utiles pour prévoir les premier et second moments des rendements des actions et du taux de change. Notre recherche nous mène à une spécification alternative pour modéliser le rendement des actifs internationaux qui est la formulation ARCH à facteurs. Pour cette dernière, nous trouvons beaucoup de support empirique, à la fois avec le test J et avec un certain nombre d'autres tests de diagnostique comme un test d'orthogonalité des résidus ou un examun systématique des erreurs sur les prix.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 95s-39.

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Length: 40 pages
Date of creation: 01 Sep 1995
Handle: RePEc:cir:cirwor:95s-39
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  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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