An examination of alternative CAPM based models in UK stock returns

Jonathan Fletcher, Joseph M. Kihanda

Research output: Contribution to journalArticle

27 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)2995-3014
Number of pages19
JournalJournal of Banking and Finance
Volume29
Issue number12
DOIs
Publication statusPublished - Dec 2005

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Capital asset pricing model
Stock returns
Stochastic discount factor
Conditional model
Conditional moments
Excess returns
Overfitting
Predictability
Finance
Distance measure
Industry
Specification error

Keywords

  • CAPM
  • UK
  • stock returns
  • capital asset pricing model

Cite this

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An examination of alternative CAPM based models in UK stock returns. / Fletcher, Jonathan; Kihanda, Joseph M.

In: Journal of Banking and Finance, Vol. 29, No. 12, 12.2005, p. 2995-3014.

Research output: Contribution to journalArticle

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