A MULTIVARIATE TEST OF THE GENERALISED MEAN-LOWER PARTIAL MOMENT ASSET PRICING MODEL: AUSTRALIAN EVIDENCE

Abstract

This paper tests the Mean‐Lower Partial Moment (MLPM) model of asset pricing, using the Gibbons (1982) multivariate methodology, as developed by Hariow and Rao (1989). The MLPM model specifies risk to be a measure of the downside deviations of return relative to a prespecified and exogenous target rate of return. The MLPM model of Hariow and Rao is a new model which has only been tested once, using US data. Therefore, further tests using independent data will help to assess whether the model deserves more serious consideration as a possible alternative to the Capital Asset Pricing Model (CAPM). In general, tests in this paper using Australian data confirm the results of Hariow and Rao (1989). The MLPM model cannot be rejected against an unspecified alternative, nor can it be rejected against the zero‐beta CAPM. Conditional on the MLPM model's validity, the optimal target rate appears to be more closely related to mean market returns than either to a risk‐free return or to a zero return. In addition, there is some evidence to support an intertemporally constant target rate of around 3 percent per month, over the 30 year period examined.