A quantile-based asset pricing model

• Main Authors: ANDO, Tomohiro, BAI, Jushan, NISHIMURA, Mitohide, YU, Jun
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2019
• Subjects: Five-factor model; Quantile-based asset pricing model; Risk premium; Econometrics
• Online Access: https://ink.library.smu.edu.sg/soe_research/2290; https://ink.library.smu.edu.sg/context/soe_research/article/3289/viewcontent/PriceRiskEdit20190707_.pdf
• Institution: Singapore Management University

It is well-known that the standard estimators of the risk premium in asset pricing models are biased when some price factors are omitted. To address this problem, we propose a novel quantile-based asset pricing model and a new estimation method. Our new asset pricing model allows for the risk premium to be quantile-dependent and our estimation method is applicable to models with unobserved factors. It avoids biased estimation results and always ensures a positive risk premium. The method is applied to the U.S., Japan, and U.K. stock markets. The empirical analysis demonstrates the clear benefits of our approach.