Abstract
Empirical test of asset-pricing models are typically performed on portfolios based on firm-characteristics such as size and book-to-market ratios etc. However, because of their strong factor structure, the characteristic sorted portfolios do not provide a sufficient test for asset pricing models. In recent, the appropriateness to use characteristics sorted portfolios has been debated. Literature suggests various alternative test portfolios sorted by other attributes to improve the empirical tests. To address this issue, we construct three sets of test portfolios sorted by firm beta, volatility, and clustering method to test various asset pricing models. We examine whether portfolios sorted by the above methods can improve the explanatory power of various alternative asset pricing models. Our test results suggest that for unconditional models, the statistical significance and estimated risk premiums depend on the choice of tests portfolios. The conditional model has more power to explain the variation of average returns than the unconditional model.
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BSE Ltd, the first ever stock exchange in Asia & the fastest Stock Exchange in world with the speed of 6 μs established in 1875 and have more than 5500 companies listed on BSE. The companies listed on BSE Ltd. command a total market capitalization of USD 1.64 Trillion as of September 2015. SENSEX is India's most widely tracked stock market benchmark index. Source: http://www.bseindia.com.
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Das, S. Asset Pricing Test Using Alternative Sets of Portfolios: Evidence from India. Asia-Pac Financ Markets 26, 339–354 (2019). https://doi.org/10.1007/s10690-018-09268-8
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DOI: https://doi.org/10.1007/s10690-018-09268-8