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

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  • Javed Iqbal
  • Robert Brooks
  • Don Galagedera

Abstract

The finite sample performance of the Wald, Generalized Method of Moment (GMM) and Likelihood Ratio (LR) tests of multivariate asset pricing tests have been investigated in several studies on the US financial markets. This article extends this analysis in two important ways. Firstly, considering the fact that the Wald test is not invariant to alternative nonlinear formulation of the null hypothesis the article investigates whether alternative forms of the Wald and GMM tests result in considerable difference in size and power. Secondly, the article 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. A multiplicative form 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.

Suggested Citation

  • Javed Iqbal & Robert Brooks & Don Galagedera, 2010. "Multivariate tests of asset pricing: simulation evidence from an emerging market," Applied Financial Economics, Taylor & Francis Journals, vol. 20(5), pages 381-395.
    • Handle: RePEc:taf:apfiec:v:20:y:2010:i:5:p:381-395
    DOI: 10.1080/09603100903459741
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    Cited by:

    1. Araújo, Tanya & Dias, João & Eleutério, Samuel & Louçã, Francisco, 2013. "A measure of multivariate kurtosis for the identification of the dynamics of a N-dimensional market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(17), pages 3708-3714.
    2. Tanya Araujo & João Dias & Samuel Eleutério & Francisco Louçã, 2012. "How Fama Went Wrong: Measures of Multivariate Kurtosis for the Identification of the Dynamics of a N-Dimensional Market," Working Papers Department of Economics 2012/21, ISEG - Lisbon School of Economics and Management, Department of Economics, Universidade de Lisboa.
    3. Ayub, Usman & Shah, Syed Zulfiqar Ali & Abbas, Qaisar, 2015. "Robust analysis for downside risk in portfolio management for a volatile stock market," Economic Modelling, Elsevier, vol. 44(C), pages 86-96.
    4. Tanya Ara'ujo & Jo~ao Dias & Samuel Eleut'erio & Francisco Louc{c}~a, 2012. "How Fama Went Wrong: Measures of Multivariate Kurtosis for the Identification of the Dynamics of a N-Dimensional Market," Papers 1207.1202, arXiv.org.
    5. Iqbal, Javed & Brooks, Robert & Galagedera, Don U.A., 2010. "Testing conditional asset pricing models: An emerging market perspective," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 897-918, September.

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