A Comparison between Performance of Linear and Nonlinear Capital Asset Pricing Models in TSE

Document Type : applied


1 PhD. Candidate, Banking Finance, Faculty of Management, University of Tehran, Iran

2 MSc, Financial Engineering, Faculty of Management, University of Tehran, Iran


Capital asset pricing model (CAPM) has been among the common models to estimate expected rate of returns. Since the linearity assumption is considered in the standard version of the capital asset pricing model, estimating beta in nonlinear setting will be inconsistent and bias-oriented. Therefore, in this study, predictive power of the Linear and Nonlinear Capital Asset Pricing Models in Tehran Stock Exchange in the period from 2006 to 2015 has been tested. Semiparametric method and local kernel regression are utilized in order to estimate nonlinear model. For this purpose, expected returns has estimated with regard to two above mentioned models during period of the study and the results have compared with realized returns. Mean absolute percentage error and especially Diebold-Mariano test are used to measure predictive power of the models. The results indicate that considering nonlinearity relation between stock returns and market returns increases predictive power of realized returns.
JEL: C12, G14
How to cite this paper: Asima, M, & Abbaszadeh Asl, A. (2016). A Comparison between Performance of Linear and Nonlinear Capital Asset Pricing Models in TSE. Quarterly Journal of Risk Modeling and Financial Engineering, 1(1), 114–128. (In Persian)


Main Subjects

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