Browse by author
Lookup NU author(s): Dr Xiaojing Song
This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).
Financial accounting standards, government regulatory requirements and the capitalmarket assumptions on which received asset pricing theory is based are used todevelop a linear-quadratic diffusion process under which the unconditional probabilitydensity of the book to market ratio of equity will be either Gaussian (that is, normal)or the Pearson Type IV. Empirical analysis based on book to market ratios drawn fromthe Compustat North America Standard & Poor’s Fundamentals Quarterly Databaseshows the Pearson Type IV probability density provides a superior fit to firm book tomarket ratio sample distributions when compared to the Gaussian density with aroundtwo-thirds of firm sample book to market ratio distributions failing standard Gaussiangoodness of fit tests. Moreover, around one in eight of the firm book to market ratiosample distributions return parameter estimates for the Pearson Type IV which arecompatible with a non-convergent (that is, undefined) variance and higher moments.It is also shown how the inverse hyperbolic sine transformation can be used to mitigatethe adverse consequences of heteroscedasticity and non-convergent momentsin empirical work involving the book to market ratio.
Author(s): Ma D, Melia A, Song X, Tippett M, Van der Burg J
Publication type: Article
Publication status: Published
Journal: The European Journal of Finance
Year: 2023
Volume: 29
Issue: 11
Pages: 1330-1353
Online publication date: 08/11/2022
Acceptance date: 05/09/2022
Date deposited: 09/10/2023
ISSN (print): 1351-847X
ISSN (electronic): 1466-4364
Publisher: Routledge
URL: https://doi.org/10.1080/1351847X.2022.2125818
ePrints DOI: 10.57711/rmz6-d209