This paper offers an alternative method for estimating expected returns. The proposed reward beta approach performs well empirically and is based on asset pricing theory. The empirical section compares this approach with the CAPM and the Fama-French three-factor model. In out-of-sample testing, both the CAPM and the three-factor model are rejected. In contrast, the reward beta approach easily p...

This paper develops a new methodology for estimating and testing conditional factor models in finance. We propose a two-stage procedure that naturally unifies the two existing approaches in the finance literature–the parametric approach and the nonparametric approach. Our combined approach possesses important advantages over both methods. Using our two-stage combined estimator, we derive new te...

The fundamental argument in the Capital Asset Pricing Model (CAPM) is that the market risk is impossible to be eliminated. Investors tend to look into the possibility of diversifying their investment activities in various countries in the same region, hence, regional of equity markets. This study makes an attempt to re-examine the dynamic relationship among the Malaysian, and the Tiger markets ...

Financial Economics researches have become active since 1950’s and many prominent theories regarding asset pricing and corporate finance have been proposed (Markowitz, 1952; Modigliani, Miller, 1958; Sharpe, 1964; Shleifer, 2000). The assumption of the efficiency of financial markets plays an important role in the literature in traditional financial theory and many research have been conducted ...

This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goa...

In this paper, I study the behavior of an investor with unit risk aversion who maximizes a utility function defined over the mean and the variance of a portfolio’s return. Conditioning information is accessible without cost and an unconditionally riskless asset is available in the market. The proposed approach makes it possible to compare the performance of a benchmark tangency portfolio (forme...

The advantage of knowing about risks is that we can change our behavior to avoid them. Of course, it is easily observed that to avoid all risks would be impossible; it might entail no flying, no driving, no walking, eating and drinking only healthy foods and never being touched by sunshine. Even a bath could be dangerous. I could not receive this prize if I sought to avoid all risks. There are ...

<p style='text-indent:20px;'>In this paper, we investigate and demonstrate the capital asset pricing model (CAPM) based on distribution uncertainty (or ambiguity, defined as about unknown probability).</p><p style='text-indent:20px;'>We first achieve directly spectral risk measures (abbreviated SCAPM) in case of normal distributions; Then can characterize SCAPM under condition...