Abstract: | Barone-Adesi (1985) has formulated a multivariate test (likelihood ratio) of an arbitrage equilibrium model, based on a quadratic specification of the process generating returns, that can be related to a three-moment CAPM. Australian equity returns are used to replicate this approach over the period 1963 to 1987. Furthermore, a generalised method of moments test of the Barone-Adesi model is also conducted. The results are favourable with regard to the arbitrage model. In addition the quadratic market model performs well against its traditional counterpart. This latter conclusion is robust with respect to allowing for monthly seasonal regularities in Australian returns. However, evidence regarding the three-moment CAPM is largely inconclusive.The author is a senior lecturer in the Department of Accounting and Finance, Monash University, Clayton, Australia. The author is pleased to acknowledge the helpful comments of Tim Brailsford, two anonymous referees, the participants of the Seminar Series at Monash University, and participants of the Second International Conference on Asian-Pacific Financial Markets, Hong Kong, 1991, the 1992 Annual Conference of the Accounting Association of Australia and New Zealand and the Fifth Annual Australasian Finance and Banking Conference, Sydney, 1992. |