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Testing Slope Homogeneity in Quantile Regression Panel Data with an Application to the Cross-Section of Stock Returns

Author

Listed:
  • Antonio F Galvao
  • Ted Juhl
  • Gabriel Montes-Rojas
  • Jose Olmo

Abstract

This article proposes tests for slope homogeneity across individuals in quantile regression fixed effects panel data models. The tests are based on the Swamy statistic. We establish the asymptotic null distribution of the tests under large panels. A prominent advantage of the proposed tests is that they are easy to implement in empirical applications. Monte Carlo experiments show evidence that the tests have good finite sample performance in terms of size and power. The tests are then applied to study the cross-section of firms’ excess asset returns using financial data on U.S. firms. The tests allow us to assess, for a given quantile of the distribution of excess returns, whether the linear effect of the pricing factors in standard linear asset pricing models is the same across stocks. The results confirm the validity of those models for the mean and central quantiles. However, for tail quantiles, the slope homogeneity tests reject the null hypothesis providing empirical evidence of pricing anomalies. This suggests that the effect of firm characteristics on the distribution of excess returns is heterogeneous across stocks during booms and busts.

Suggested Citation

  • Antonio F Galvao & Ted Juhl & Gabriel Montes-Rojas & Jose Olmo, 2018. "Testing Slope Homogeneity in Quantile Regression Panel Data with an Application to the Cross-Section of Stock Returns," Journal of Financial Econometrics, Oxford University Press, vol. 16(2), pages 211-243.
    • Handle: RePEc:oup:jfinec:v:16:y:2018:i:2:p:211-243.
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    File URL: http://hdl.handle.net/10.1093/jjfinec/nbx016
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    Citations

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    Cited by:

    1. Chuliá, Helena & Koser, Christoph & Uribe, Jorge M., 2021. "Analyzing the Nonlinear Pricing of Liquidity Risk according to the Market State," Finance Research Letters, Elsevier, vol. 38(C).
    2. Yiren Wang & Liangjun Su & Yichong Zhang, 2022. "Low-rank Panel Quantile Regression: Estimation and Inference," Papers 2210.11062, arXiv.org.
    3. Daan Opschoor & Dick van Dijk & Philip Hans Franses, 2021. "Heterogeneity in Manufacturing Growth Risk," Tinbergen Institute Discussion Papers 21-036/III, Tinbergen Institute.

    More about this item

    Keywords

    panel data; quantile regression; slope homogeneity; stock returns;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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