IDEAS home Printed from https://ideas.repec.org/a/eee/intfin/v79y2022ics1042443122000853.html
   My bibliography  Save this article

International tests of the ZCAPM asset pricing model

Author

Listed:
  • Kolari, James W.
  • Huang, Jianhua Z.
  • Butt, Hilal Anwar
  • Liao, Huiling

Abstract

Kolari, Liu, and Huang (2021) recently proposed and empirically tested a new asset pricing model dubbed that ZCAPM that consistently outperformed popular multifactor models using U.S. stock returns. Is the ZCAPM a false discovery? This paper provides international tests of the ZCAPM for Canada, France, Germany, Japan, United Kingdom, and United States. Out-of-sample cross-sectional tests indicate that: (1) the goodness-of-fit of the ZCAPM is substantially higher than the CAPM and widely-used three- and four-factor models; and (2) factor loadings associated with return dispersion in the ZCAPM are more consistently and highly significant than factors in other models across different countries.

Suggested Citation

  • Kolari, James W. & Huang, Jianhua Z. & Butt, Hilal Anwar & Liao, Huiling, 2022. "International tests of the ZCAPM asset pricing model," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000853
    DOI: 10.1016/j.intfin.2022.101607
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1042443122000853
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.intfin.2022.101607?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Roll, Richard, 1980. "Orthogonal Portfolios," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(5), pages 1005-1023, December.
    2. Geert Bekaert & Campbell R. Harvey, 2000. "Foreign Speculators and Emerging Equity Markets," Journal of Finance, American Finance Association, vol. 55(2), pages 565-613, April.
    3. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    4. Xiaoquan Jiang, 2010. "Return dispersion and expected returns," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 24(2), pages 107-135, June.
    5. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. "Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-1764, December.
    6. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    7. Tarun Chordia & Amit Goyal & Alessio Saretto & Andrew KarolyiEditor, 2020. "Anomalies and False Rejections," Review of Finance, European Finance Association, vol. 33(5), pages 2134-2179.
    8. Rıza Demirer & Shrikant P. Jategaonkar, 2013. "The conditional relation between dispersion and return," Review of Financial Economics, John Wiley & Sons, vol. 22(3), pages 125-134, September.
    9. Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009. "High idiosyncratic volatility and low returns: International and further U.S. evidence," Journal of Financial Economics, Elsevier, vol. 91(1), pages 1-23, January.
    10. John H. Cochrane, 2011. "Presidential Address: Discount Rates," Journal of Finance, American Finance Association, vol. 66(4), pages 1047-1108, August.
    11. Christie, W. G. & Huang, R. D., 1994. "The changing functional relation between stock returns and dividend yields," Journal of Empirical Finance, Elsevier, vol. 1(2), pages 161-191, January.
    12. Kent Daniel & Sheridan Titman & K.C. John Wei, 2001. "Explaining the Cross‐Section of Stock Returns in Japan: Factors or Characteristics?," Journal of Finance, American Finance Association, vol. 56(2), pages 743-766, April.
    13. Tobias Adrian & Joshua Rosenberg, 2008. "Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2997-3030, December.
    14. Stivers, Christopher T., 2003. "Firm-level return dispersion and the future volatility of aggregate stock market returns," Journal of Financial Markets, Elsevier, vol. 6(3), pages 389-411, May.
    15. Bekaert, Geert & Hodrick, Robert J. & Zhang, Xiaoyan, 2012. "Aggregate Idiosyncratic Volatility," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(6), pages 1155-1185, December.
    16. J. Tobin, 1958. "Liquidity Preference as Behavior Towards Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 25(2), pages 65-86.
    17. Shanken, Jay, 1992. "On the Estimation of Beta-Pricing Models," The Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 1-33.
    18. Angelidis, Timotheos & Sakkas, Athanasios & Tessaromatis, Nikolaos, 2015. "Stock market dispersion, the business cycle and expected factor returns," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 265-279.
    19. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    20. Lewellen, Jonathan & Nagel, Stefan & Shanken, Jay, 2010. "A skeptical appraisal of asset pricing tests," Journal of Financial Economics, Elsevier, vol. 96(2), pages 175-194, May.
    21. Bekaert, Geert & Harvey, Campbell R., 1997. "Emerging equity market volatility," Journal of Financial Economics, Elsevier, vol. 43(1), pages 29-77, January.
    22. Garcia, René & Mantilla-García, Daniel & Martellini, Lionel, 2014. "A Model-Free Measure of Aggregate Idiosyncratic Volatility and the Prediction of Market Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 49(5-6), pages 1133-1165, December.
    23. Eugene F Fama & Kenneth R French, 2020. "Comparing Cross-Section and Time-Series Factor Models," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 1891-1926.
    24. Kewei Hou & G. Andrew Karolyi & Bong-Chan Kho, 2011. "What Factors Drive Global Stock Returns?," The Review of Financial Studies, Society for Financial Studies, vol. 24(8), pages 2527-2574.
    25. Loungani, Prakash & Rush, Mark & Tave, William, 1990. "Stock market dispersion and unemployment," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 367-388, June.
    26. Eugene F Fama & Kenneth R French & Andrew KarolyiEditor, 2020. "Comparing Cross-Section and Time-Series Factor Models," Review of Finance, European Finance Association, vol. 33(5), pages 1891-1926.
    27. Gibbons, Michael R. & Ferson, Wayne, 1985. "Testing asset pricing models with changing expectations and an unobservable market portfolio," Journal of Financial Economics, Elsevier, vol. 14(2), pages 217-236, June.
    28. Karolyi, G. Andrew & Stulz, Rene M., 2003. "Are financial assets priced locally or globally?," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 16, pages 975-1020, Elsevier.
    29. Fama, Eugene F. & French, Kenneth R., 2012. "Size, value, and momentum in international stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 457-472.
    30. Robert Connolly & Chris Stivers, 2003. "Momentum and Reversals in Equity‐Index Returns During Periods of Abnormal Turnover and Return Dispersion," Journal of Finance, American Finance Association, vol. 58(4), pages 1521-1556, August.
    31. Eugene F. Fama, 1968. "Risk, Return And Equilibrium: Some Clarifying Comments," Journal of Finance, American Finance Association, vol. 23(1), pages 29-40, March.
    32. John M. Griffin, 2002. "Are the Fama and French Factors Global or Country Specific?," The Review of Financial Studies, Society for Financial Studies, vol. 15(3), pages 783-803.
    33. Lettau, Martin & Maggiori, Matteo & Weber, Michael, 2014. "Conditional risk premia in currency markets and other asset classes," Journal of Financial Economics, Elsevier, vol. 114(2), pages 197-225.
    34. Chang, Bo Young & Christoffersen, Peter & Jacobs, Kris, 2013. "Market skewness risk and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(1), pages 46-68.
    35. Fama, Eugene F & French, Kenneth R, 1996. "The CAPM Is Wanted, Dead or Alive," Journal of Finance, American Finance Association, vol. 51(5), pages 1947-1958, December.
    36. Fama, Eugene F & French, Kenneth R, 1995. "Size and Book-to-Market Factors in Earnings and Returns," Journal of Finance, American Finance Association, vol. 50(1), pages 131-155, March.
    37. Jonathan Fletcher, 2010. "Arbitrage and the Evaluation of Linear Factor Models in UK Stock Returns," The Financial Review, Eastern Finance Association, vol. 45(2), pages 449-468, May.
    38. Simin, Timothy, 2008. "The Poor Predictive Performance of Asset Pricing Models," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 43(2), pages 355-380, June.
    39. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-1483, September.
    40. Alan Gregory & Rajesh Tharyan & Angela Christidis, 2013. "Constructing and Testing Alternative Versions of the Fama–French and Carhart Models in the UK," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 40(1-2), pages 172-214, January.
    41. Kewei Hou & Chen Xue & Lu Zhang, 2015. "Editor's Choice Digesting Anomalies: An Investment Approach," The Review of Financial Studies, Society for Financial Studies, vol. 28(3), pages 650-705.
    42. Shanken, Jay, 1987. "Multivariate proxies and asset pricing relations : Living with the Roll critique," Journal of Financial Economics, Elsevier, vol. 18(1), pages 91-110, March.
    43. Chen, Yong & Cliff, Michael & Zhao, Haibei, 2017. "Hedge Funds: The Good, the Bad, and the Lucky," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(3), pages 1081-1109, June.
    44. Fama, Eugene F. & French, Kenneth R., 2015. "A five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 116(1), pages 1-22.
    45. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    46. Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006. "The Cross‐Section of Volatility and Expected Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 259-299, February.
    47. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    48. Keiichi Kubota & Hitoshi Takehara, 2018. "Does the Fama and French Five†Factor Model Work Well in Japan?," International Review of Finance, International Review of Finance Ltd., vol. 18(1), pages 137-146, March.
    49. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    50. Daniel, Kent & Titman, Sheridan, 2012. "Testing Factor-Model Explanations of Market Anomalies," Critical Finance Review, now publishers, vol. 1(1), pages 103-139, January.
    51. Gibbons, Michael R & Ross, Stephen A & Shanken, Jay, 1989. "A Test of the Efficiency of a Given Portfolio," Econometrica, Econometric Society, vol. 57(5), pages 1121-1152, September.
    52. Wayne E. Ferson & Dennis H. Locke, 1998. "Estimating the Cost of Capital Through Time: An Analysis of the Sources of Error," Management Science, INFORMS, vol. 44(4), pages 485-500, April.
    53. 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 607-636, May-June.
    54. Tarun Chordia & Amit Goyal & Alessio Saretto, 2020. "Anomalies and False Rejections," The Review of Financial Studies, Society for Financial Studies, vol. 33(5), pages 2134-2179.
    55. Eugene F. Fama & Kenneth R. French, 2004. "The Capital Asset Pricing Model: Theory and Evidence," Journal of Economic Perspectives, American Economic Association, vol. 18(3), pages 25-46, Summer.
    56. Moerman, G.A., 2005. "How Domestic is the Fama and French Three-Factor Model? An Application to the Euro Area," ERIM Report Series Research in Management ERS-2005-035-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    57. P. N. Jones & G. J. McLachlan, 1990. "Maximum Likelihood Estimation from Grouped and Truncated Data with Finite Normal Mixture Models," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 39(2), pages 273-282, June.
    58. Ferson, Wayne & Nallareddy, Suresh & Xie, Biqin, 2013. "The “out-of-sample” performance of long run risk models," Journal of Financial Economics, Elsevier, vol. 107(3), pages 537-556.
    59. Black, Fischer, 1972. "Capital Market Equilibrium with Restricted Borrowing," The Journal of Business, University of Chicago Press, vol. 45(3), pages 444-455, July.
    60. L'Her, Jean-Francois & Masmoudi, Tarek & Suret, Jean-Marc, 2004. "Evidence to support the four-factor pricing model from the Canadian stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 14(4), pages 313-328, October.
    61. Chichernea, Doina C. & Holder, Anthony D. & Petkevich, Alex, 2015. "Does return dispersion explain the accrual and investment anomalies?," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 133-148.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. James W. Kolari & Jianhua Z. Huang & Wei Liu & Huiling Liao, 2022. "Further Tests of the ZCAPM Asset Pricing Model," JRFM, MDPI, vol. 15(3), pages 1-23, March.
    2. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, July.
    3. Amit Goyal, 2012. "Empirical cross-sectional asset pricing: a survey," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 26(1), pages 3-38, March.
    4. Sakemoto, Ryuta, 2023. "The long-run risk premium in the intertemporal CAPM: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 89(C).
    5. Cakici, Nusret & Zaremba, Adam, 2023. "Recency bias and the cross-section of international stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 84(C).
    6. Wei Liu & James W. Kolari, 2022. "Multifactor Market Indexes," JRFM, MDPI, vol. 15(4), pages 1-26, March.
    7. Chichernea, Doina C. & Holder, Anthony D. & Petkevich, Alex, 2015. "Does return dispersion explain the accrual and investment anomalies?," Journal of Accounting and Economics, Elsevier, vol. 60(1), pages 133-148.
    8. Söhnke M. Bartram & Harald Lohre & Peter F. Pope & Ananthalakshmi Ranganathan, 2021. "Navigating the factor zoo around the world: an institutional investor perspective," Journal of Business Economics, Springer, vol. 91(5), pages 655-703, July.
    9. Cakici, Nusret & Zaremba, Adam, 2022. "Salience theory and the cross-section of stock returns: International and further evidence," Journal of Financial Economics, Elsevier, vol. 146(2), pages 689-725.
    10. Ciciretti, Rocco & Dalò, Ambrogio & Dam, Lammertjan, 2023. "The contributions of betas versus characteristics to the ESG premium," Journal of Empirical Finance, Elsevier, vol. 71(C), pages 104-124.
    11. Calvet, Laurent E. & Betermier, Sebastien & Jo, Evan, 2019. "A Supply and Demand Approach to Equity Pricing," CEPR Discussion Papers 13974, C.E.P.R. Discussion Papers.
    12. Fletcher, Jonathan, 2018. "Betas V characteristics: Do stock characteristics enhance the investment opportunity set in U.K. stock returns?," The North American Journal of Economics and Finance, Elsevier, vol. 46(C), pages 114-129.
    13. Hoang, Khoa & Huang, Ronghong & Truong, Helen, 2023. "Resurrecting the market factor: A case of data mining across international markets," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    14. Sebastien Valeyre, 2020. "Refined model of the covariance/correlation matrix between securities," Papers 2001.08911, arXiv.org.
    15. Demirer, Rıza & Jategaonkar, Shrikant P., 2013. "The conditional relation between dispersion and return," Review of Financial Economics, Elsevier, vol. 22(3), pages 125-134.
    16. Waszczuk, Antonina, 2013. "A risk-based explanation of return patterns—Evidence from the Polish stock market," Emerging Markets Review, Elsevier, vol. 15(C), pages 186-210.
    17. Kaserer Christoph & Hanauer Matthias X., 2017. "25 Jahre Fama-French-Modell: Erklärungsgehalt, Anomalien und praktische Implikationen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(2), pages 98-116, June.
    18. Beaulieu, Marie-Claude & Gagnon, Marie-Hélène & Khalaf, Lynda, 2016. "Less is more: Testing financial integration using identification-robust asset pricing models," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 171-190.
    19. Sebastien Valeyre & Sofiane Aboura & Denis Grebenkov, 2019. "The Reactive Beta Model," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(1), pages 71-113, March.
    20. Hanauer, Matthias X. & Lauterbach, Jochim G., 2019. "The cross-section of emerging market stock returns," Emerging Markets Review, Elsevier, vol. 38(C), pages 265-286.

    More about this item

    Keywords

    International asset pricing; Cross-sectional stock returns; Return dispersion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:intfin:v:79:y:2022:i:c:s1042443122000853. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/intfin .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.