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The Robustness of Risk-Return Nonlinearities to the Normality Assumption

Published online by Cambridge University Press:  06 April 2009

Carolyn Carroll ,
Paul D. Thistle  and
K. C. John Wei
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Abstract

In a recent study, Tinic and West (1986) empirically reexamine the risk-return relationship posited by the traditional mean-variance CAPM. They find a positive nonlinear relationship between risk and return, except during January when the market rewards bearing nonsystematic risk. This study examines the hypothesis that nonnormality of return distributions may account for some of these anomalous results. We compare Shalit and Yitzhaki's (1984) mean-extended Gini CAPM—an equilibrium asset pricing relation that is independent of the form of the underlying asset distribution—with the traditional CAPM. Our results indicate that the nonlinear risk-return relationship and the size and January effects are robust to nonnormality of return distributions.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 27 , Issue 3 , September 1992 , pp. 419 - 435
Copyright
Copyright © School of Business Administration, University of Washington 1992

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