IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Multivariate tests of asset pricing: Simulation evidence from an emerging market

  • Javed Iqbal

    ()

  • Robert Brooks

    ()

  • Don U.A. Galagedera

    ()

The finite sample performance of the Wald, GMM and Likelihood Ratio (LR) tests of multivariate asset pricing tests have been investigated in several studies on the US financial markets. This paper extends this analysis in two important ways. Firstly, considering the fact that the Wald test is not invariant to alternative non-linear formulation of the null hypothesis the paper investigates whether alternative forms of the Wald and GMM tests result in considerable difference in size and power. Secondly, the paper extends the analysis to the emerging market data. Emerging markets provide an interesting practical laboratory to test asset pricing models. The characteristics of emerging markets are different from the well developed markets of US, Japan and Europe. It is found that the asymptotic Wald and GMM tests based on Chi-Square critical values result in considerable size distortions. The bootstrap tests yield the correct sizes. Multiplicative from of bootstrap GMM test appears to outperform the LR test when the returns deviate from normality and when the deviations from the asset pricing model are smaller. Application of the bootstrap tests to the data from the Karachi Stock Exchange strongly supports the zero-beta CAPM. However the low power of the multivariate tests warrants a careful interpretation of the results.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2008/wp2-08.pdf
Download Restriction: no

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 2/08.

as
in new window

Length: 33 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:msh:ebswps:2008-2
Contact details of provider: Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Phone: +61-3-9905-2489
Fax: +61-3-9905-5474
Web page: http://www.buseco.monash.edu.au/depts/ebs/
Email:


More information through EDIRC

Order Information: Web: http://www.buseco.monash.edu.au/depts/ebs/pubs/wpapers/ Email:


References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-55, July.
  2. Davidson, Russell & MacKinnon, James G., 1999. "The Size Distortion Of Bootstrap Tests," Econometric Theory, Cambridge University Press, vol. 15(03), pages 361-376, June.
  3. Chou, Pin-Huang, 2000. "Alternative Tests of the Zero-Beta CAPM," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 23(4), pages 469-93, Winter.
  4. Moy, Ronald L. & Lee, Ahyee & Chen, Thomas P., 1997. "Multivariate tests of the capm under heteroskedasticity: A note," International Review of Economics & Finance, Elsevier, vol. 6(4), pages 431-439.
  5. Gibbons, Michael R., 1982. "Multivariate tests of financial models : A new approach," Journal of Financial Economics, Elsevier, vol. 10(1), pages 3-27, March.
  6. Atsushi Inoue & Mototsugu Shintani, 2001. "Bootstrapping GMM Estimators for Time Series," Vanderbilt University Department of Economics Working Papers 0129, Vanderbilt University Department of Economics, revised Aug 2003.
  7. Jobson, J. D. & Korkie, Bob, 1982. "Potential performance and tests of portfolio efficiency," Journal of Financial Economics, Elsevier, vol. 10(4), pages 433-466, December.
  8. Hall, Peter & Horowitz, Joel L, 1996. "Bootstrap Critical Values for Tests Based on Generalized-Method-of-Moments Estimators," Econometrica, Econometric Society, vol. 64(4), pages 891-916, July.
  9. Pin-Huang Chou & Mei-Chen Lin, 2002. "Tests of international asset pricing model with and without a riskless asset," Applied Financial Economics, Taylor & Francis Journals, vol. 12(12), pages 873-883.
  10. Affleck-Graves, J. F. & Bradfield, D. J., 1993. "An examination of the power of Univariate tests of the CAPM: A simulation approach," Journal of Economics and Business, Elsevier, vol. 45(1), pages 17-33, February.
  11. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-36, May-June.
  12. Surajit, R. & Ravikumar, B. & Savin, N.E., 1998. "Robust Wald Tests in SUR Systems with Adding Up Restrictions: An Algebraic Approach to Proofs of Invariance," Working Papers 98-01, University of Iowa, Department of Economics.
  13. Campbell R. Harvey, 1994. "Predictable Risk and Returns in Emerging Markets," NBER Working Papers 4621, National Bureau of Economic Research, Inc.
  14. Gregory, Allan W & Veall, Michael R, 1985. "Formulating Wald Tests of Nonlinear Restrictions," Econometrica, Econometric Society, vol. 53(6), pages 1465-68, November.
  15. Khwaja, Asim Ijaz & Mian, Atif, 2005. "Unchecked intermediaries: Price manipulation in an emerging stock market," Journal of Financial Economics, Elsevier, vol. 78(1), pages 203-241, October.
  16. Amsler, Christine E. & Schmidt, Peter, 1985. "A Monte Carlo investigation of the accuracy of multivariate CAPM tests," Journal of Financial Economics, Elsevier, vol. 14(3), pages 359-375, September.
  17. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  18. Blume, Marshall E, 1975. "Betas and Their Regression Tendencies," Journal of Finance, American Finance Association, vol. 30(3), pages 785-95, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:msh:ebswps:2008-2. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Simone Grose)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.