Header

UZH-Logo

Maintenance Infos

Testing for monotonicity in expected asset returns


Romano, Joseph P; Wolf, Michael (2013). Testing for monotonicity in expected asset returns. Working paper series / Department of Economics 17, University of Zurich.

Abstract

Many postulated relations in finance imply that expected asset returns strictly increase in an underlying characteristic. To examine the validity of such a claim, one needs to take the entire range of the characteristic into account, as is done in the recent proposal of Patton and Timmermann (2010). But their test is only a test for the direction of monotonicity, since it requires the relation to be monotonic from the outset: either weakly decreasing under the null or strictly increasing under the alternative. When the relation is non-monotonic or weakly increasing, the test can break down and falsely ‘establish’ a strictly increasing relation with high probability. We offer some alternative tests that do not share this problem. The behavior of the various tests is illustrated via Monte Carlo studies. We also present empirical applications to real data.

Abstract

Many postulated relations in finance imply that expected asset returns strictly increase in an underlying characteristic. To examine the validity of such a claim, one needs to take the entire range of the characteristic into account, as is done in the recent proposal of Patton and Timmermann (2010). But their test is only a test for the direction of monotonicity, since it requires the relation to be monotonic from the outset: either weakly decreasing under the null or strictly increasing under the alternative. When the relation is non-monotonic or weakly increasing, the test can break down and falsely ‘establish’ a strictly increasing relation with high probability. We offer some alternative tests that do not share this problem. The behavior of the various tests is illustrated via Monte Carlo studies. We also present empirical applications to real data.

Statistics

Citations

3 citations in Microsoft Academic

Downloads

37 downloads since deposited on 23 Jan 2013
13 downloads since 12 months
Detailed statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Economics
Working Paper Series > Department of Economics
Dewey Decimal Classification:330 Economics
JEL Classification:C12, C58, G12, G14
Uncontrolled Keywords:Bootstrap, CAPM, Monotonicity tests, Non-monotonic relations
Language:English
Date:January 2013
Deposited On:23 Jan 2013 15:09
Last Modified:16 Feb 2018 17:31
Series Name:Working paper series / Department of Economics
Number of Pages:36
ISSN:1664-7041
Additional Information:Revised version
OA Status:Green
Official URL:http://www.econ.uzh.ch/static/wp/econwp017.pdf
Related URLs:http://www.econ.uzh.ch/static/workingpapers.php

Download

Download PDF  'Testing for monotonicity in expected asset returns'.
Preview
Filetype: PDF
Size: 403kB