Influence diagnostics in the capital asset pricing model under elliptical distributions

Abstract

In this paper we consider the Capital Asset Pricing Model under Elliptical (symmetric) Distributions. This class of distributions, which contains the normal distribution, t, contaminated normal and power exponential, among others, offers a more flexible framework for modelling asset prices or returns. In order to analyze the sensibility to possible outliers and/or atypical returns of the maximum likelihood estimators, the local influence method was implemented. The results are illustrated by using a set of shares from companies who trade in the Chilean Stock Market. Our main conclusion is that symmetric distributions having heavier tails than those of the normal distribution, especially the t distribution with small degrees of freedom, show a better fit and allow the reduction of the influence of atypical returns in the maximum likelihood estimators.

Keywords:

• robust estimation
• diagnostics
• local influence
• elliptical distributions

Acknowledgements

The authors acknowledge the partial financial support from Fapesp, 03/02747-4, Brasil and Project Dipuv 17/2003, Universidad de Valpara´i so, Chile.