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Book part
Publication date: 23 December 2005

David Ng and Mehdi Sadeghi

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss…

Abstract

This paper studies the empirical application of an asset pricing model derived from the irrational individual behavior of loss aversion. Previous research using loss aversion asset pricing finds conclusive evidence that estimations match market equity premium and volatility using simulation data. We find that within its empirical application, the estimated errors are comparable to errors estimated from the capital asset pricing model. This study of the correlations between rational and irrational asset pricing model from the empirical results finds validity for both estimated values. Finally, we see the importance of cultures, economic development and financial development on asset pricing through an empirical examination of five pacific-basin countries in the estimation of asset pricing models.

Details

Asia Pacific Financial Markets in Comparative Perspective: Issues and Implications for the 21st Century
Type: Book
ISBN: 978-0-76231-258-0

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Article
Publication date: 31 December 2019

Vaibhav Lalwani and Madhumita Chakraborty

The purpose of this paper is to compare the performance of various multifactor asset pricing models across ten emerging and developed markets.

Abstract

Purpose

The purpose of this paper is to compare the performance of various multifactor asset pricing models across ten emerging and developed markets.

Design/methodology/approach

The general methodology to test asset pricing models involves regressing test asset returns (left-hand side assets) on pricing factors (right-hand side assets). Then the performance of different models is evaluated based on how well they price multiple test assets together. The parameters used to compare relative performance of different models are their pricing errors (GRS statistic and average absolute intercepts) and explained variation (average adjusted R2).

Findings

The Fama-French five-factor model improves the pricing performance for stocks in Australia, Canada, China and the USA. The pricing in these countries appears to be more integrated. However, the superior performance in these four countries is not consistent across a variety of test assets and the magnitude of reduction in pricing errors vis-à-vis three- or four-factor models is often economically insignificant. For other markets, the parsimonious three-factor model or its four-factor variants appear to be more suitable.

Originality/value

Unlike most asset pricing studies that use test assets based on variables that are already used to construct RHS factors, this study uses test assets that are generally different from RHS sorts. This makes the tests more robust and less biased to be in favour of any multifactor model. Also, most international studies of asset pricing tests use data for different markets and combine them into regions. This study provides the evidence from ten countries separately because prior research has shown that locally constructed factors are more suitable to explain asset prices. Further, this study also tests for the usefulness of adding a quality factor in the existing asset pricing models.

Details

Managerial Finance, vol. 46 no. 3
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 30 November 2011

Massimo Guidolin

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models

Abstract

I survey applications of Markov switching models to the asset pricing and portfolio choice literatures. In particular, I discuss the potential that Markov switching models have to fit financial time series and at the same time provide powerful tools to test hypotheses formulated in the light of financial theories, and to generate positive economic value, as measured by risk-adjusted performances, in dynamic asset allocation applications. The chapter also reviews the role of Markov switching dynamics in modern asset pricing models in which the no-arbitrage principle is used to characterize the properties of the fundamental pricing measure in the presence of regimes.

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Missing Data Methods: Time-Series Methods and Applications
Type: Book
ISBN: 978-1-78052-526-6

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Article
Publication date: 4 May 2020

Rahul Roy and Santhakumar Shijin

The purpose of the study is to examine the dynamics in the troika of asset pricing, volatility, and the business cycle in the US and Japan.

Abstract

Purpose

The purpose of the study is to examine the dynamics in the troika of asset pricing, volatility, and the business cycle in the US and Japan.

Design/methodology/approach

The study uses a six-factor asset pricing model to derive the realized volatility measure for the GARCH-type models.

Findings

The comprehensive empirical investigation led to the following conclusion. First, the results infer that the market portfolio and human capital are the primary discounting factors in asset return predictability during various phases of the subprime crisis phenomenon for the US and Japan. Second, the empirical estimates neither show any significant impact of past conditional volatility on the current conditional volatility nor any significant effect of subprime crisis episodes on the current conditional volatility in the US and Japan. Third, there is no asymmetric volatility effect during the subprime crisis phenomenon in the US and Japan except the asymmetric volatility effect during the post-subprime crisis period in the US and full period in Japan. Fourth, the volatility persistence is relatively higher during the subprime crisis period in the US, whereas during the subprime crisis transition period in Japan than the rest of the phases of the subprime crisis phenomenon.

Originality/value

The study argues that the empirical investigations that employed the autoregressive method to derive the realized volatility measure for the parameter estimation of GARCH-type models may result in incurring spurious estimates. Further, the empirical results of the study show that using the six-factor asset pricing model in an intertemporal framework to derive the realized volatility measure yields better estimation results while estimating the parameters of GARCH-type models.

Details

Journal of Economic Studies, vol. 48 no. 1
Type: Research Article
ISSN: 0144-3585

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Article
Publication date: 1 March 2006

Philip Gharghori, Howard Chan and Robert Faff

Daniel and Titman (1997) contend that the Fama‐French three‐factor model’s ability to explain cross‐sectional variation in expected returns is a result of characteristics…

Abstract

Daniel and Titman (1997) contend that the Fama‐French three‐factor model’s ability to explain cross‐sectional variation in expected returns is a result of characteristics that firms have in common rather than any risk‐based explanation. The primary aim of the current paper is to provide out‐of‐sample tests of the characteristics versus risk factor argument. The main focus of our tests is to examine the intercept terms in Fama‐French regressions, wherein test portfolios are formed by a three‐way sorting procedure on book‐to‐market, size and factor loadings. Our main test focuses on ‘characteristic‐balanced’ portfolio returns of high minus low factor loading portfolios, for different size and book‐to‐market groups. The Fama‐French model predicts that these regression intercepts should be zero while the characteristics model predicts that they should be negative. Generally, despite the short sample period employed, our findings support a risk‐factor interpretation as opposed to a characteristics interpretation. This is particularly so for the HML loading‐based test portfolios. More specifically, we find that: the majority of test portfolios tend to reveal higher returns for higher loadings (while controlling for book‐to‐market and size characteristics); the majority of the Fama‐French regression intercepts are statistically insignificant; for the characteristic‐balanced portfolios, very few of the Fama‐French regression intercepts are significant.

Details

Pacific Accounting Review, vol. 18 no. 1
Type: Research Article
ISSN: 0114-0582

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Article
Publication date: 6 July 2010

Keiichi Kubota and Hitoshi Takehara

The purpose of this paper is to determine the best conditional asset pricing model for the Tokyo Stock Exchange sample by utilizing long‐run daily data. It aims to…

Abstract

Purpose

The purpose of this paper is to determine the best conditional asset pricing model for the Tokyo Stock Exchange sample by utilizing long‐run daily data. It aims to investigate whether there are any other firm‐specific variables that can explain abnormal returns of the estimated asset pricing model.

Design/methodology/approach

The individual firm sample was used to conduct various cross‐sectional tests of conditional asset pricing models, at the same time as using test portfolios in order to confirm the mean variance efficiency of basic unconditional models.

Findings

The paper's multifactor models in unconditional forms are rejected, with the exception of the five‐factor model. Further, the five‐factor model is better overall than the Fama and French model and other alternative models, according to both the Gibbons, Ross, and Shanken test and the Hansen and Jagannathan distance measure test. Next, using the final conditional five‐factor model as the de facto model, it was determined that the turnover ratio and the size can consistently predict Jensen's alphas. The book‐to‐market ratio (BM) and the past one‐year returns can also significantly predict the alpha, albeit to a lesser extent.

Originality/value

In the literature related to Japanese data, there has never been a comprehensive test of conditional asset pricing models using the long‐run data of individual firms. The conditional asset pricing model derived for this study has led to new findings about the predictability of past one‐year returns and the turnover ratio.

Details

Managerial Finance, vol. 36 no. 8
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 February 2001

Yuichiro Kawaguchi and Kazuhiro Tsubokawa

This paper proposes a discrete time real options model with time‐dependent and serial correlated return process for a real estate development problem with waiting options…

Abstract

This paper proposes a discrete time real options model with time‐dependent and serial correlated return process for a real estate development problem with waiting options. Based on a Martingale condition, the paper claims to be able to relax many unrealistic assumptions made in the typical real option pricing methodology. Our real option model is a new one without assuming the return process as “Ito Process”, specifically, without assuming a geometric Brownian motion. We apply the model to the condominium market in Tokyo metropolitan area in the period 1971‐1997 and estimate the value of waiting to invest in 1998‐2007. The results partly provide realistic estimates of the parameters and show the applicability of our model.

Details

Journal of Property Investment & Finance, vol. 19 no. 1
Type: Research Article
ISSN: 1463-578X

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Article
Publication date: 20 March 2018

Yaojie Zhang, Yu Wei and Benshan Shi

The purpose of this paper is to develop a loan insurance pricing model allowing for the skewness and kurtosis existing in underlying asset returns.

Abstract

Purpose

The purpose of this paper is to develop a loan insurance pricing model allowing for the skewness and kurtosis existing in underlying asset returns.

Design/methodology/approach

Using the theory of Gram-Charlier option, the authors first derive a closed-form solution of the Gram-Charlier pricing model. To address the difficulties in implementing the pricing model, the authors subsequently propose an iterative method to estimate skewness and kurtosis in practical application, which shows a relatively fast convergence rate in the empirical test.

Findings

Not only the theoretical analysis but also the empirical evidence shows that the effects of skewness and kurtosis on loan insurance premium tend to be negative and positive, respectively. Furthermore, the actual values of skewness and kurtosis are usually negative and positive, respectively, which leads to the empirical result that the pricing model ignoring skewness and kurtosis substantially underestimates loan insurance premium.

Originality/value

This paper proposes a loan insurance pricing model considering the skewness and kurtosis of asset returns, in which the authors use the theory of Gram-Charlier option. More importantly, the authors further propose a novel iterative method to estimate skewness and kurtosis in practical application. The empirical evidence suggests that the Gram-Charlier pricing model captures the information content of skewness and kurtosis.

Details

China Finance Review International, vol. 8 no. 4
Type: Research Article
ISSN: 2044-1398

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Article
Publication date: 8 June 2021

Huong Le and Andros Gregoriou

This paper aims to empirically examine the relationship between stock liquidity and asset pricing, using a new price impact ratio adjusted for free float as the…

Abstract

Purpose

This paper aims to empirically examine the relationship between stock liquidity and asset pricing, using a new price impact ratio adjusted for free float as the approximation of liquidity. The free-float-adjusted ratio is free from size bias and encapsulates the impact of trading frequency. It is more comprehensive than alternative price impact ratios because it incorporates the shares available to the public for trading.

Design/methodology/approach

The authors are using univariate and multivariate econometric methods to test the significance of a newly created price impact ratio. The authors are using secondary data and asset pricing models in their analysis. The authors use a data sample of all US listed companies over the period of 1997–2017.

Findings

The authors provide evidence that the free-float-adjusted price impact ratio is superior to all price impact ratios used in the previous academic literature. The authors also discover that their findings are robust to the financial crises between 2007 and 2009.

Originality/value

This is the first comprehensive study on a newly established price impact ratio. The authors show the significance of this ratio and explain why it is superior to all previous price impact ratios, established in prior research.

Details

Journal of Economic Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 0144-3585

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Book part
Publication date: 27 November 2017

Hung-Chi Li, Syouching Lai, James A. Conover, Frederick Wu and Bin Li

Lai, Li, Conover, and Wu (2010) propose a four-factor financial distress model to explain stock returns in the U.S. and Japanese markets. We examine this model in the…

Abstract

Lai, Li, Conover, and Wu (2010) propose a four-factor financial distress model to explain stock returns in the U.S. and Japanese markets. We examine this model in the stock markets of Australia, and six Asian markets (Hong Kong, Indonesia, Korea, Malaysia, Singapore, and Thailand). We find broad empirical support for the four-factor financial distress risk asset-pricing model in those markets. The four-factor financial distress asset pricing model improves explanatory power beyond the Fama–French (1993) three-factor asset pricing model in six of the seven Asian-Pacific markets (12 of 14 portfolio groupings), while the Carhart (1997) momentum-based asset pricing model only improves explanatory power beyond the Fama–French model in three of the seven markets (4 of 14 portfolio groupings).

Details

Growing Presence of Real Options in Global Financial Markets
Type: Book
ISBN: 978-1-78714-838-3

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