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Specification errors of asset-pricing models for a market characterized by few large capitalization firms

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  • Nader Virk
  • Hilal Butt

Abstract

The evaluation for the specification errors of asset-pricing models is conducted using numerous characteristic portfolios for the Finnish stock market. The selection of the market is motivated by the atypical setting wherein few firms dominate the total market capitalization and small numbers of stocks are listed. We report diverging risk-returns trade-offs for the average tendencies of the stocks and for the actual growth in the invested stocks. We show Carhart ( 1997 ) model produces the smallest pricing errors across all the tested specifications although with different significant risk for EW and VW test portfolios. Deviations in the significant risk factors in the asset pricing tests becomes prevalent for using a simple technique of equally weighted (EW) and value weighted (VW) test assets. We suggest more cautious analyses for markets that have peculiar features instead of generalizing to standard evidence. Copyright Springer Science+Business Media New York 2016

Suggested Citation

  • Nader Virk & Hilal Butt, 2016. "Specification errors of asset-pricing models for a market characterized by few large capitalization firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 40(1), pages 68-84, January.
    • Handle: RePEc:spr:jecfin:v:40:y:2016:i:1:p:68-84
    DOI: 10.1007/s12197-014-9297-z
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    More about this item

    Keywords

    Specification errors; Unconditional CAPM; Scaling variables; SDF; Hansen and Jagannathan (1997) distance; Macro variables; G11; G12; G15;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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