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Testing slope homogeneity in quantile regression panel data with an application to the cross-section of stock returns

Testing slope homogeneity in quantile regression panel data with an application to the cross-section of stock returns
Testing slope homogeneity in quantile regression panel data with an application to the cross-section of stock returns
This article proposes tests for slope homogeneity across individuals in quantile regression fixed effects panel data models. The tests are based on the Swamy statistic. We establish the asymptotic null distribution of the tests under large panels. A prominent advantage of the proposed tests is that they are easy to implement in empirical applications. Monte Carlo experiments show evidence that the tests have good finite sample performance in terms of size and power. The tests are then applied to study the cross-section of firms’ excess asset returns using financial data 20 on U.S. firms. The tests allow us to assess, for a given quantile of the distribution of excess returns, whether the linear effect of the pricing factors in standard linear asset pricing models is the same across stocks. The results confirm the validity of those models for the mean and central quantiles. However, for tail quantiles, the slope homogeneity tests reject the null hypothesis providing empirical evidence of 25 pricing anomalies. This suggests that the effect of firm characteristics on the distribution of excess returns is heterogeneous across stocks during booms and busts.
panel data, quantile regression, slope homogeneity, stock returns
1479-8409
211-243
Galvao, Antonio F.
6f2af55a-e340-404e-a787-cb2f90c87ebd
Juhl, Ted
2e4067c3-9abb-433f-b4e5-05a1b23aed98
Montes-Rojas, Gabriel
69548d5d-9e1f-4f6c-8453-6c2675b8dc21
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Galvao, Antonio F.
6f2af55a-e340-404e-a787-cb2f90c87ebd
Juhl, Ted
2e4067c3-9abb-433f-b4e5-05a1b23aed98
Montes-Rojas, Gabriel
69548d5d-9e1f-4f6c-8453-6c2675b8dc21
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e

Galvao, Antonio F., Juhl, Ted, Montes-Rojas, Gabriel and Olmo, Jose (2018) Testing slope homogeneity in quantile regression panel data with an application to the cross-section of stock returns. Journal of Financial Econometrics, 16 (2), 211-243. (doi:10.1093/jjfinec/nbx016).

Record type: Article

Abstract

This article proposes tests for slope homogeneity across individuals in quantile regression fixed effects panel data models. The tests are based on the Swamy statistic. We establish the asymptotic null distribution of the tests under large panels. A prominent advantage of the proposed tests is that they are easy to implement in empirical applications. Monte Carlo experiments show evidence that the tests have good finite sample performance in terms of size and power. The tests are then applied to study the cross-section of firms’ excess asset returns using financial data 20 on U.S. firms. The tests allow us to assess, for a given quantile of the distribution of excess returns, whether the linear effect of the pricing factors in standard linear asset pricing models is the same across stocks. The results confirm the validity of those models for the mean and central quantiles. However, for tail quantiles, the slope homogeneity tests reject the null hypothesis providing empirical evidence of 25 pricing anomalies. This suggests that the effect of firm characteristics on the distribution of excess returns is heterogeneous across stocks during booms and busts.

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Accepted/In Press date: 27 March 2017
e-pub ahead of print date: 5 May 2017
Published date: March 2018
Keywords: panel data, quantile regression, slope homogeneity, stock returns

Identifiers

Local EPrints ID: 412393
URI: http://eprints.soton.ac.uk/id/eprint/412393
ISSN: 1479-8409
PURE UUID: 7300f705-edee-4984-821c-32636a324b3e
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

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Date deposited: 17 Jul 2017 13:34
Last modified: 07 Oct 2020 05:51

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