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Asset pricing in the Brazilian financial market: five-factor GAMLSS modeling

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Abstract

We model asset prices in Brazil using the five-factor asset pricing model. We show that Gaussian regression models fail to capture the full data dynamics. We then fit Generalized Additive Models for Location Scale and Shape with data-selected underlying laws. They are based on laws related to the Student t distribution, appear to be correctly specified and deliver good data fits. All estimated models are evaluated using performance measures that are standard in the literature.

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Notes

  1. Systematic or systemic risk is the kind of risk that affects the entire economy, e.g., collapses in the financial system that result in a drop in all asset prices.

  2. Extreme value theory is used to model rare events. It employs results on the asymptotic distributions of standardized maximal and minimal values obtained from a random sample of \(n \ge 2\) variates.

  3. Excess return is the difference between the return of a risky asset and that of a risk-free asset.

  4. A momentum trading strategy is a strategy based on buying or selling securities according to peak signals detected using a momentum indicator; see e.g., Chan et al. (1996).

  5. Anomalies are patterns that are not explained by a pricing model (Novy-Marx and Velikov 2016).

  6. Accruals are revenues and incurred expenses that impact a company’s profit. Accruals include payables, receivables, accrued tax liabilities and accrued earned or payable interest.

  7. The Real Plan was a monetary reform that put an end to a period of hyperinflation.

  8. Inter-bank Deposit Certificates are securities issued by financial institutions. Their purpose is to facilitate the transfer of resources between institutions that have reserves and institutions that need capital to replenish their cash flow.

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Acknowledgements

The authors thank an anonymous referee for comments suggestions and suggestions that led to a much improved manuscript. They also gratefully acknowledge partial financial support from CAPES and CNPq, Brazil.

Funding

Funding was provided by conselho nacional de desenvolvimento científico e tecnológico (CNPq) (Grant Nos. 305305/2019-0, 301651/2017-5).

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Authors and Affiliations

  1. Graduated Program in Economics (PIMES), Universidade Federal de Pernambuco, Cidade Universitária, Recife, PE, 50670-901, Brazil

    Renan O. Regis

  2. Department of Statistics, Universidade Federal de Pernambuco, Cidade Universitária, Recife, PE, 50670-901, Brazil

    Raydonal Ospina & Francisco Cribari-Neto

  3. Department of Accounting and Actuarial Sciences, Universidade Federal de Pernambuco, Cidade Universitária, Recife, PE, 50670-901, Brazil

    Wilton Bernardino

Authors
  1. Renan O. Regis
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  2. Raydonal Ospina
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  3. Wilton Bernardino
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  4. Francisco Cribari-Neto
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Correspondence to Raydonal Ospina.

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Regis, R.O., Ospina, R., Bernardino, W. et al. Asset pricing in the Brazilian financial market: five-factor GAMLSS modeling. Empir Econ 64, 2373–2409 (2023). https://doi.org/10.1007/s00181-022-02316-3

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  • DOI: https://doi.org/10.1007/s00181-022-02316-3

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