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Return Explanatory Ability and Predictability of Non-Linear Market Models

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  • Chi-Hsiou Hung

    (Durham Business School)

Abstract

Recent literature supports the pricing of higher-order systematic co-moments of returns. This paper provides some support for the quadratic-market model that is consistent with the three-moment CAPM in explaining time-series returns of the winner and the smallest size portfolios. This study further uses three innovative methodologies in analysing the ability of the linear CAPM, the quadratic- and the cubic-market models in predicting one-period- ahead returns on individual stocks, equally- and value-weighted portfolios of momentum, size and country sorts. The results are surprising but important that the higher-moment CAPM market models do not outperform the linear CAPM in the return predictability tests.

Suggested Citation

  • Chi-Hsiou Hung, 2007. "Return Explanatory Ability and Predictability of Non-Linear Market Models," Working Papers 2007_05, Durham University Business School.
    • Handle: RePEc:dur:durham:2007_05
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset Pricing; Non-Linearity; Return Predictability;
    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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