A multivariate test of the generalised mean-lower partial moment asset pricing model: Australian evidence

Article Abstract:

This paper tests the Mean-Lower Partial Moment (MLPM) model of asset pricing, using the Gibbons (1982) multivariate methodology, as developed by Harlow and Rao (1989). The LPM model specifies risk to be a measure of the downside deviations of return relative to a prespecified and exogenous target rate of return. The MLPM model of Harlow and Rao is a new model which has only been tested once, using US data. Therefore, further tests using independent data will help to assess whether the model deserves more serious consideration as a possible alternative to the Capital Asset Pricing Model (CAPM). In general, tests in this paper using Australian data confirm the results of Harlow and Rao (1989). The MLPM model cannot be rejected against an unspecified alternative, nor it can be rejected against the zero-beta CAPM. Conditional on the MLPM model's validity, the optimal target rate appears to be more closely related to mean market returns than either to a risk-free return or to a zero return. In addition, there is some evidence to support an intertemporally constant target rate of around 3 percent per month, over the 30 year period examined. (Reprinted by permission of the publisher.)

Valuation, Assets (Accounting)

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A likelihood ratio test of the zero-beta CAPM in Australian equity returns

Article Abstract:

This paper tests the zero-beta CAPM with Australian equity returns, using the multivariate approach developed by Gibbons (1982). For the period 1958 to 1987, based on its asymptotic distribution, the likelihood ratio test (LRT) statistic indicates a strong rejection of the model when an equally weighted market index is used. However, small sample adjustments to the test suggested by Jobson and Korkie (1982) and by Shanken (1985) place the validity of this conclusion in some doubt. When a value weighted market index is used for the period 1974 to 1987, the test reveal at least moderate support for the zero-beta CAPM. (Reprinted by permission of the publisher).

Australia, Securities, Price indexes

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An empirical test of the arbitrage pricing theory on Australian stock returns 1974-85

Article Abstract:

This paper examines empirically, issues concerning the Arbitrage Pricing Theory (APT). Firstly, in the spirit of Chamberlain and Rothschild (1983), the existence of an approximate factor structure is explored. Secondly, following Beggs (1986) and employing a principal components approach, a test of arbitrage pricing and the importance of the error of approximation, is conducted. Finally, using a non nested framework, the APT and CAPM are tested against each other. The results show mixed support for the APT having up to 3 priced factors. (Reprinted by permission of the publisher.)

Capital assets pricing model, Capital asset pricing model, Arbitrage

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