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Contribution Details

Type Working Paper
Scope Discipline-based scholarship
Title Testing for monotonicity in expected asset returns
Organization Unit
  • Joseph P Romano
  • Michael Wolf
  • English
Institution University of Zurich
Series Name Working paper series / Department of Economics
Number 17
ISSN 1664-7041
Number of Pages 36
Date 2013
Abstract Text 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.
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Keywords Bootstrap, CAPM, Monotonicity tests, systematic relation, non-monotonic relations, Bootstrap-Statistik, Capital-Asset-Pricing-Modell, Monotone Funktion, Monte-Carlo-Simulation
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