On the Empirical Importance of the Conditional Skewness Assumption in Modelling the Relationship between Risk and Return

• Authors: M. Pipień
• Languages of publication: EN

Abstracts

EN

We present the results of an application of Bayesian inference in testing the relation between risk and return on the financial instruments. On the basis of the Intertemporal Capital Asset Pricing Model, proposed by Merton we built a general sampling distribution suitable in analysing this relationship. The most important feature of our assumptions is that the skewness of the conditional distribution of returns is used as an alternative source of relation between risk and return. This general specification relates to Skewed Generalized Autoregressive Conditionally Heteroscedastic-in-Mean model. In order to make conditional distribution of financial returns skewed we considered the unified approach based on the inverse probability integral transformation. In particular, we applied hidden truncation mechanism, inverse scale factors, order statistics concept, Beta and Bernstein distribution transformations and also a constructive method. Based on the daily excess returns on the Warsaw Stock Exchange Index we checked the empirical importance of the conditional skewness assumption on the relation between risk and return on the Warsaw Stock Market. We present posterior probabilities of all competing specifications as well as the posterior analysis of the positive sign of the tested relationship.

Keywords

EN

89.65.Gh; 05.10.Gg

Discipline

• 05.10.Gg: Stochastic analysis methods (Fokker-Planck, Langevin, etc.)
• 89.65.Gh: Economics; econophysics, financial markets, business and management(for economic issues regarding production and use of renewable energy, see 88.05.Lg)

• Publisher: Institute of Physics, Polish Academy of Sciences
• Journal: Acta Physica Polonica A
• Year: 2008
• Volume: 114
• Issue: 3
• Pages: 517-524

Dates

published

2008-09

received

2007-11-22

Contributors

author

M. Pipień

• Department of Econometrics, Cracow University of Economics, Rakowicka 27, 31-510 Kraków, Poland

References

• 1. R.C. Merton, Econometrica 41, 867 (1973)
• 2. K.R. French, G.W. Schwert, R.F. Stambaugh, J. Financ. Econom. 19, 3 (1987)
• 3. J.Y. Campbell, L. Hentschel, J. Financial Economics 31, 281 (1992)
• 4. L.R. Glosten, R. Jagannathan, D.E. Runkle, J. Finance 48, 1779 (1993)
• 5. R.F. Engle, D.M. Lilien, R.P. Robins, Econometrica 55, 391 (1987)
• 6. J.T. Scruggs, J. Finance 53, 575 (1998)
• 7. C.R. Harvey, A. Siddique, J. Finance 55, 1263 (2000)
• 8. M. Pipień, Acta Phys. Pol. B 37, 3105 (2000)
• 9. J. Osiewalski, M. Pipień, in: 26th Int. Conf. MACROMODELS'99, Eds. P. Wdowiński, W. Welfe, ABSOLWENT,Łódź2000, p. 354
• 10. T. Bollerslev, J. Econometrics 31, 307 (1986)
• 11. C. Fernández, M.F.J. Steel, J. Am. Statist. Assoc. 93, 359 (1998)
• 12. B.E. Hansen, Int. Econom. Rev. 35, 705 (1994)
• 13. A. Azzalini, Scandinav. J. Statistics 12, 171 (1985)
• 14. M.C. Jones, Test 13, 1 (2004)
• 15. J. Ferreira, M.F.J. Steel, J. Am. Statist. Assoc. 101, 823 (2006)
• 16. M.C. Jones, M.J. Faddy, J. Roy. Statist. Assoc. B 65, 159 (2003)

Identifiers

DOI

10.12693/APhysPolA.114.517