Higher-order comoments and asset returns: evidence from emerging equity markets
TL;DR: It is reported that co-skewness and co-kurtosis are not important in explaining stock returns in Vietnam stock market and market risk premium is the most important factor while other popular factors such as SMB, HML and UMD have minor impact on stock returns.
Abstract: This article examines the role of co-skewness and co-kurtosis in explaining portfolio excess returns utilizing time-series and Fama–Macbeth cross-sectional regression methods in the context of an emerging market. The sample consists of listed firms in Vietnam stock market covering the period from September 2011 to December 2016. This paper reports that co-skewness and co-kurtosis are not important in explaining stock returns in Vietnam stock market. More importantly, we find that market risk premium is the most important factor while other popular factors such as SMB, HML and UMD have minor impact on stock returns. This finding is crucial in identifying factors significantly influencing stock returns in emerging equity markets. This paper also supports the proposition that findings from advanced markets might not be able to generalize into the context of emerging markets. The finding has direct implications for portfolio analysis and risk management.
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TL;DR: In this article, the Laplace mixture distribution for stock share returns is derived from conditional N(0,x2) distribution and the conditioning variable, x2, is assumed to be an exponentially distributed random variable.
Abstract: The Laplace mixture distribution for stock share returns is derived from conditional N(0,x2) distribution The conditioning variable, x2, is assumed to be an exponentially distributed random variable This offers a natural stochastic interpretation of the risk involved with the stock share Maximum likelihood estimates for returns of the twenty most traded shares and the aggregate index of the Helsinki stock market in late 1980's do not reject the Laplace distriburion model The results extend to returns over longer periods than one day
64 citations
TL;DR: In this article, the authors investigate how sensitive cryptocurrency returns are to higher-order realized moments (i.e., variance, skewness, kurtosis, hyper-skewness and hyper-kurtosis) and whether such sensitivity varies across bear and bull market conditions.
19 citations
TL;DR: In this paper , the authors developed some properties for the relationships among central moments, stochastic dominance (SD), risk-seeking SD, and integrals for the general utility functions and the polynomial utility functions of both risk averters and risk seekers without imposing the same-location-scale family condition.
Abstract: In this paper, we first develop some properties to state the relationships among central moments, stochastic dominance (SD), risk-seeking stochastic dominance (RSD), and integrals for the general utility functions and the polynomial utility functions of both risk averters and risk seekers. We then introduce the moment rule and establish some necessary and/or sufficient conditions between stochastic dominance and the moment rule for the general utility functions and the polynomial utility functions of both risk averters and risk seekers without imposing the same-location-scale-family condition. Thereafter, we apply the moment rules to develop some properties of portfolio diversification for the general utility functions and the polynomial utility functions for both risk averters and risk seekers. The findings in our paper enable academics and practitioners to draw preferences of both risk averters and risk seekers on their choices of portfolios or assets by using different moments. We illustrate this by using the moment rule tests to compare excess return of 49 industry portfolios from Kenneth French's online data library. • We develop some properties for the relationships among central moments, stochastic dominance (SD), risk-seeking SD, and integrals. • We introduce the moment rule and establish the necessary and/or sufficient conditions between SD and the moment rule for the general and polynomial utilities • We develop some properties of portfolio diversification for the general and polynomial utilities for both risk averters and risk seekers. • We illustrate the moment rule tests to compare excess return of 49 industry portfolios from Kenneth French’'s online data library • The findings in our paper enable academics and practitioners to draw preferences on their choices of the portfolios or assets by using different moments.
3 citations
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TL;DR: In this paper, the impact of financial regulations on bond market liquidity was investigated, focusing on the U.S. regulations such as the Dodd-Frank Act and the Volcker Rule.
Abstract: This paper investigates the impacts of financial regulations on bond market liquidity, focusing on the U.S. regulations such as the Dodd-Frank Act and the Volcker Rule. Our analyses at market level and bond level suggest that the mentioned regulations do not harm the liquidity of the bond market as a whole. It is evident that the regulations actually improve the bond market liquidity, especially for investment grade bonds. Non-investment grade bonds are not affected by changes in regulations. These findings are also evident in the event study of announcement effects regarding regulations milestones. The analysis also suggests that the transaction costs are affected by the changes in regulations more than the price impacts. Additionally, the event study indicates that the anticipation of regulatory changes do lead to lower liquidity but these impacts only occur for big milestones and eventually die out.
2 citations
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TL;DR: In this article, the authors identify five common risk factors in the returns on stocks and bonds, including three stock-market factors: an overall market factor and factors related to firm size and book-to-market equity.
24,874 citations
TL;DR: In this paper, the authors present a body of positive microeconomic theory dealing with conditions of risk, which can be used to predict the behavior of capital marcets under certain conditions.
Abstract: One of the problems which has plagued thouse attempting to predict the behavior of capital marcets is the absence of a body of positive of microeconomic theory dealing with conditions of risk/ Althuogh many usefull insights can be obtaine from the traditional model of investment under conditions of certainty, the pervasive influense of risk in finansial transactions has forced those working in this area to adobt models of price behavior which are little more than assertions. A typical classroom explanation of the determinationof capital asset prices, for example, usually begins with a carefull and relatively rigorous description of the process through which individuals preferences and phisical relationship to determine an equilibrium pure interest rate. This is generally followed by the assertion that somehow a market risk-premium is also determined, with the prices of asset adjusting accordingly to account for differences of their risk.
17,922 citations
TL;DR: In this paper, Bhandari et al. found that the relationship between market/3 and average return is flat, even when 3 is the only explanatory variable, and when the tests allow for variation in 3 that is unrelated to size.
Abstract: Two easily measured variables, size and book-to-market equity, combine to capture the cross-sectional variation in average stock returns associated with market 3, size, leverage, book-to-market equity, and earnings-price ratios. Moreover, when the tests allow for variation in 3 that is unrelated to size, the relation between market /3 and average return is flat, even when 3 is the only explanatory variable. THE ASSET-PRICING MODEL OF Sharpe (1964), Lintner (1965), and Black (1972) has long shaped the way academics and practitioners think about average returns and risk. The central prediction of the model is that the market portfolio of invested wealth is mean-variance efficient in the sense of Markowitz (1959). The efficiency of the market portfolio implies that (a) expected returns on securities are a positive linear function of their market O3s (the slope in the regression of a security's return on the market's return), and (b) market O3s suffice to describe the cross-section of expected returns. There are several empirical contradictions of the Sharpe-Lintner-Black (SLB) model. The most prominent is the size effect of Banz (1981). He finds that market equity, ME (a stock's price times shares outstanding), adds to the explanation of the cross-section of average returns provided by market Os. Average returns on small (low ME) stocks are too high given their f estimates, and average returns on large stocks are too low. Another contradiction of the SLB model is the positive relation between leverage and average return documented by Bhandari (1988). It is plausible that leverage is associated with risk and expected return, but in the SLB model, leverage risk should be captured by market S. Bhandari finds, howev er, that leverage helps explain the cross-section of average stock returns in tests that include size (ME) as well as A. Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) find that average returns on U.S. stocks are positively related to the ratio of a firm's book value of common equity, BE, to its market value, ME. Chan, Hamao, and Lakonishok (1991) find that book-to-market equity, BE/ME, also has a strong role in explaining the cross-section of average returns on Japanese stocks.
14,517 citations
TL;DR: In this article, the relationship between average return and risk for New York Stock Exchange common stocks was tested using a two-parameter portfolio model and models of market equilibrium derived from the two parameter portfolio model.
Abstract: This paper tests the relationship between average return and risk for New York Stock Exchange common stocks. The theoretical basis of the tests is the "two-parameter" portfolio model and models of market equilibrium derived from the two-parameter portfolio model. We cannot reject the hypothesis of these models that the pricing of common stocks reflects the attempts of risk-averse investors to hold portfolios that are "efficient" in terms of expected value and dispersion of return. Moreover, the observed "fair game" properties of the coefficients and residuals of the risk-return regressions are consistent with an "efficient capital market"--that is, a market where prices of securities
14,171 citations
TL;DR: In this article, the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish is discussed.
Abstract: Publisher Summary This chapter discusses the problem of selecting optimal security portfolios by risk-averse investors who have the alternative of investing in risk-free securities with a positive return or borrowing at the same rate of interest and who can sell short if they wish. It presents alternative and more transparent proofs under these more general market conditions for Tobin's important separation theorem that “ … the proportionate composition of the non-cash assets is independent of their aggregate share of the investment balance … and for risk avertere in purely competitive markets when utility functions are quadratic or rates of return are multivariate normal. The chapter focuses on the set of risk assets held in risk averters' portfolios. It discusses various significant equilibrium properties within the risk asset portfolio. The chapter considers a few implications of the results for the normative aspects of the capital budgeting decisions of a company whose stock is traded in the market. It explores the complications introduced by institutional limits on amounts that either individuals or corporations may borrow at given rates, by rising costs of borrowed funds, and certain other real world complications.
9,970 citations