An examination of alternative CAPM-based models in UK stock returns |
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Authors: | Jonathan Fletcher Joseph Kihanda |
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Institution: | aDepartment of Accounting and Finance, University of Strathclyde, Curran Building, 100 Cathedral Street, Glasgow, G4 0LN, United Kingdom;bInstitute of Financial Management, Shaaban Robert Street, P.O. Box 3918, Dar Es Salaam, Tanzania |
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Abstract: | We evaluate the performance of unconditional and conditional versions of seven stochastic discount factor models in UK stock returns between January 1975 and December 2001. We find that the conditional four-moment capital asset pricing model (CAPM) has the best performance among the models we consider in terms of the lowest Hansen, L.P., Jagannathan, R., 1997. Assessing specification errors in stochastic discount factor models. Journal of Finance 52, 591–607] distance measure and explaining the time-series predictability of industry portfolio excess returns. Conditional models also do a better job than unconditional models. However we find that the superior performance of the conditional four-moment CAPM, and conditional models in general, arises in part due to overfitting the data. |
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Keywords: | Conditional models Four-moment CAPM |
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