Please use this identifier to cite or link to this item: http://hdl.handle.net/1893/28486
Appears in Collections:Accounting and Finance Journal Articles
Peer Review Status: Refereed
Title: Rational functions: an alternative approach to asset pricing
Author(s): Chakraborty, Nilanjana
Elgammal, Mohammed M
McMillan, David
Keywords: Asset pricing
average returns
rational function model
CAPM, Fama French 3 and 5 factor models
asset volumes
Issue Date: Feb-2019
Citation: Chakraborty N, Elgammal MM & McMillan D (2019) Rational functions: an alternative approach to asset pricing. Applied Economics, 51 (20), pp. 2091-2119. https://doi.org/10.1080/00036846.2018.1540848
Abstract: This 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.
DOI Link: 10.1080/00036846.2018.1540848
Rights: This item has been embargoed for a period. During the embargo please use the Request a Copy feature at the foot of the Repository record to request a copy directly from the author. You can only request a copy if you wish to use this work for your own research or private study. This is an Accepted Manuscript of an article published by Taylor & Francis Group in Applied Economics on 7 Nov 2018, available online: http://www.tandfonline.com/10.1080/00036846.2018.1540848.

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