Analysing the return distributions of Australian stocks: the CAPM, factor models and quantile regressions. (1st January 2013)

• Record Type: Journal Article
• Authors: Allen, David E.; Singh, Abhay Kumar; Powell, Robert
• Is Part Of: Global business & economics review. Volume 15:Number 1(2013)
• Page Start: 88
• Page End: 109
• Publication Date: 2013-01-01
• Subjects: capital asset pricing model -- CAPM -- book to market ratios -- quantile regression -- S&P/ASX-50 stocks; Economics -- Periodicals; International economic relations -- Periodicals; 330.5
• Languages: English
• ISSNs: 1097-4954

Abstract

Traditionally, ordinary least square (OLS) regression methods are used to test asset pricing models. This study focuses on the use of quantile regression as an alternative approach to the analysis of risk and return distributions in quantitative finance. It empirically examines the behaviour of two widely used asset pricing factors, beta and book to market ratios, but the focus is on minimising absolute deviations around the median rather than minimising squared deviations around the mean of their distributions, as we apply quantile regressions as opposed to OLS. We show how OLS is less able to capture the extreme values or the adverse losses in the return distribution, which on the other hand are captured by quantile regressions. The study not only shows that the factors do not necessarily follow a linear relationship but also shows that the traditional use of OLS becomes less effective when it comes to analysing the extremes within a distribution, which are often a source of keen interest for investors and risk managers.