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AuthorChakraborty N.
AuthorElgammal M.M.
AuthorMcMillan D.
Available date2020-04-09T12:27:27Z
Publication Date2019
Publication NameApplied Economics
ResourceScopus
ISSN36846
URIhttp://dx.doi.org/10.1080/00036846.2018.1540848
URIhttp://hdl.handle.net/10576/13970
AbstractThis paper shows that asset prices are linear polynomials of various underlying explanatory factors and asset returns being ratios of these polynomials, are rational functions that do not add linearly when averaging. Hence, average returns should be modeled based on stock prices. However, continuous returns may be treated as approximately linear across time and modeled directly. Our new Rational Function (RF) models, empirically outperform the traditional asset pricing models like the Capital Asset Pricing Model (CAPM) and the Fama-French three and five-factor models for both average and continuous returns. Moreover, the RF theory also provides a model to estimate the asset volumes. The average change in asset volumes together with average returns provide the estimates for average change in market values of assets. Thus, the RF model approach can be used to select assets that provide either highest returns for profit maximization or highest change in market values for wealth maximization for given levels of risk.
Languageen
PublisherRoutledge
SubjectAsset pricing
asset volumes
average returns
CAPM
Fama French 3 and 5 factor models
rational function model
TitleRational functions: an alternative approach to asset pricing
TypeArticle
Pagination2091-2119
Issue Number20
Volume Number51


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