Conditional Betas, Higher Comoments and the Cross-Section of Expected Stock Returns

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Conditional Betas, Higher Comoments and the Cross-Section of Expected Stock Returns

Show simple item record Xu, Lei en_GB 2010-11-12T13:14:21Z en_GB 2011-01-25T17:25:21Z en_US 2013-03-21T11:43:41Z 2010-06-21 en_GB
dc.description.abstract This thesis examines the performance of different models of conditional betas and higher comoments in the context of the cross-section of expected stock returns, both in-sample and out-of-sample. I first examine the performance of different conditional market beta models by using monthly returns of the Fama-French 25 portfolios formed by the quintiles of size and book-to-market ratio in Chapter 3. This is a cross-sectional test of the conditional CAPM. The models examined include simple OLS regressions, the macroeconomic variables model, the state-space model, the multivariate GARCH model and the realized beta model. The results show that the state-space model performs best in-sample with significant betas and insignificant intercepts. For the out-of-sample performance, however, none of the models examined can explain returns of the 25 portfolios. Next, I examine the recently proposed realized beta model, which is based on the realized volatility literature, by using individual stocks listed in the US market in Chapter 4. I extend the realized market beta model to betas of multi-factor asset pricing models. Models tested are the CAPM, the Fama-French three-factor model and a four-factor model including the three Fama-French factors and a momentum factor. Realized betas of different models are used in the cross-section regressions along with firm-level variables such as size, book-to-market ratio and past returns. The in-sample results show that market beta is significant and additional betas of multi-factor models can reduce although not eliminate the effects of firm-level variables. The out-of-sample results show that no betas are significant. The results are robust across different markets such as NYSE, AMEX and NASDAQ. In Chapter 5, I test if realized coskewness and cokurtosis can help explain the cross-section of stock returns. I add coskewness and cokurtosis to the factor pricing models tested in Chapter 4. The results show that the coefficients of coskewness and cokurtosis have the correct sign as predicted by the higher-moment CAPM theory but only cokurtosis is significant. Cokurtosis is significant not only in-sample but also out-of-sample, suggesting cokurtosis is an important risk. However, the effects of firm-level variables remain significant after higher moments are included, indicating a rejection of higher-moment asset pricing models. The results are also robust across different markets such as NYSE, AMEX and NASDAQ. The overall results of this thesis indicate a rejection of the conditional asset pricing models. Models of systematic risks, i.e. betas and higher comoments, cannot explain the cross-section of expected stock returns. en_GB
dc.identifier.uri en_GB
dc.language.iso en en_GB
dc.publisher University of Exeter en_GB
dc.rights.embargoreason To allow publication of research en_GB
dc.subject Asset Pricing en_GB
dc.subject Cross Section of Expected Returns en_GB
dc.subject Beta en_GB
dc.subject Skewness Kurtosis en_GB
dc.subject CAPM en_GB
dc.subject APT en_GB
dc.title Conditional Betas, Higher Comoments and the Cross-Section of Expected Stock Returns en_GB
dc.type Thesis or dissertation en_GB 2012-05-12T04:00:05Z en_US 2013-03-21T11:43:41Z
dc.contributor.advisor Harris, Richard D. F. en_GB
dc.contributor.advisor Tong, Zhenxu en_GB
dc.publisher.department Xfi Centre for Finance and Investment en_GB
dc.type.degreetitle PhD in Finance en_GB
dc.type.qualificationlevel Doctoral en_GB
dc.type.qualificationname PhD en_GB

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