Robust Estimation and Forecasting of the Capital Asset Pricing Model
In this paper, we develop a modified maximum likelihood (MML) estimator for the multiple linear regression model with underlying student t distribution. We obtain the closed form of the estimators, derive the asymptotic properties, and demonstrate that the MML estimator is more appropriate for estimating the parameters of the Capital Asset Pricing Model by comparing its performance with least squares estimators (LSE) on the monthly returns of US portfolios. The empirical results reveal that the MML estimators are more efficient than LSE in terms of the relative efficiency of one-step-ahead forecast mean square error in small samples.
|capital asset pricing model, maximum likelihood estimators, modified maximum likelihood estimators, robustness, student t family|
|Econometric and Statistical Methods: General (jel C1), Econometric Methods: Single Equation Models; Single Variables (jel C2), General Financial Markets (jel G1)|
|Tinbergen Institute Discussion Paper Series|
|Discussion paper / Tinbergen Institute|
|Organisation||Erasmus School of Economics|
Bian, G, McAleer, M.J, & Wong, W.-K. (2013). Robust Estimation and Forecasting of the Capital Asset Pricing Model (No. TI 13-036/III). Discussion paper / Tinbergen Institute (pp. 1–26). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/39186