Bayesian asset pricing testing under multivariate t-distribution

ABSTRACT

The distribution of asset returns has often been proved to be heavy-tailed. In this paper, based on the Fama-French five-factor model with multivariate t-distribution, we develop a convenient and explicit Bayesian approach to test asset pricing. The developed test statistic is only by-product of the Markov Chain Monte Carlo (MCMC) outputs, and hence it is very convenient in practice. Simulation studies demonstrate the effectiveness of the finite sample performance of the proposed approach. Finally, the Fama-French data are used for testing the efficiency of financial markets, and the result shows that the market efficiency is rejected.

KEYWORDS:

• Bayesian approach
• asset pricing testing
• multivariate t
• Markov Chain Monte Carlo
• Wald test

JEL CLASSIFICATION:

• C11
• C12
• G12

Acknowledgments

Dr. Yong Li gratefully acknowledges the financial support of the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (No. 14XNI005).

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China [14XNI005].