Tests of asset pricing models in Australia using non-normal distributions

This article demonstrates that Australian equity returns and factors are strongly non-normal and that non-normality seems to be adequately modelled as a jointly multivariate t random variable with 7 degrees of freedom. When means and alphas are estimated using maximum likelihood estimation under the multivariate t case, we find dramatic changes in the estimates of the mean of the test assets, and find that the sign of the price of SMB risk flips from positive to negative (though insignificant). The evidence against asset pricing models is larger when returns are non-normal. This methodology can be viewed as a robust estimator, and its results suggest caution should be applied in interpreting estimates of risk premia and alphas obtained using non-robust methods. JEL Classification : G1, C1