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Can Stochastic Discount Factor Models Explain the Cross Section of Equity Returns?
| Content Provider | Scilit |
|---|---|
| Author | Abhakorn, Pongrapeeporn Smith, Peter N. Wickens, Michael R. |
| Copyright Year | 2016 |
| Description | Journal: SSRN Electronic Journal We propose a multivariate test based on no-arbitrage conditions under the stochastic discount factor approach, which compares cross-sectional variation in equity returns to the cross-sectional variation in their conditional covariance with the discount factors. Using the multivariate generalized heteroskedasticity in mean model to estimate the 25 portfolios formed on size and book-to-market ratio, together each with its own arbitrage condition, we find that the no-arbitrage test rejects the consumption-based capital asset pricing model (C-CAPM). Although the conditional covariances of returns with consumption exhibit negative variation across size, they do not vary across the book-to-market ratio. Thus, the C-CAPM can capture size effect, but not value effect. Allowing the coefficients on the consumption covariances to be different largely improves the fit of the C-CAPM, however. The value effect appears to be associated with book-to-market ratio as well as size. Book-to-market ratio separately does not generate information about average returns that cannot be explained by the C-CAPM. One possible explanation for this extra dimension of risk is the investment growth prospect of firms. Low book-to-market ratio firms may be expected to have higher rates of growth while small firms may also be expected to behave similarly. |
| Related Links | http://eprints.whiterose.ac.uk/94216/1/New_ASW_for_RFE3.pdf https://papers.ssrn.com/sol3/Delivery.cfm?abstractid=2723422 |
| ISSN | 10914358 |
| e-ISSN | 15565068 |
| DOI | 10.2139/ssrn.2723422 |
| Journal | SSRN Electronic Journal |
| Language | English |
| Publisher | Elsevier BV |
| Publisher Date | 2016-01-27 |
| Access Restriction | Open |
| Subject Keyword | Journal: SSRN Electronic Journal Risk Premium Equity Return Stochastic Discount Factor No-arbitrage Condition |
| Content Type | Text |
| Resource Type | Article |
| Subject | Public Health, Environmental and Occupational Health Psychiatry and Mental Health |
