The Return Performance of Cubic Market Model: An Application to Emerging Markets

ABSTRACT

This article studies the performance of the high-order moment capital asset pricing model (CAPM) market models in emerging markets. We apply the cubic market model (4-moment CAPM) to 16 emerging market stock indices ranging from January 2010 to September 2015. Performance of the model is evaluated through the Fama and MacBeth’s two-step regression and through different corrections proposed in the literature, as well as generalized method of moments (GMM) estimation. According to Fama–MacBeth’s procedure, CAPM, the quadratic and cubic market models seem to be insignificant for the analyzed sample; however, the GMM estimation shows that quadratic model is valid for Indian, Polish, and Thai country indices, whereas cubic market model is accurate for Indian country index.

KEY WORDS:

• cubic market model
• emerging markets
• equity premium
• GMM

JEL CLASSIFICATION:

• G11
• G12.

Acknowledgment

We are grateful to the editors of the special issue and the anonymous referees for their constructive comments.

Funding

Financial support from the Spanish Ministry of Economics and Competitiveness, through the project ECO2016-75631-P, FAPA-Uniandes, through the project P16.100322.001, and Universidad Icesi through the project CA0113193 is gratefully acknowledged.

Additional information

Funding

Financial support from the Spanish Ministry of Economics and Competitiveness, through the project ECO2016-75631-P, FAPA-Uniandes, through the project P16.100322.001, and Universidad Icesi through the project CA0113193 is gratefully acknowledged.