Further Tests of the ZCAPM Asset Pricing Model

A recent book by Kolari, Liu, and Huang (KLH) (2021) developed a new theoretical capital asset pricing model dubbed the ZCAPM, which outperformed well-known multifactor models in cross-sectional tests using U.S. stocks. This paper extends their analyses by employing a longer sample period from 1927 to 2020. Our results in subperiods 1927 to 1964 and 1965 to 2020 corroborate the findings in KLH. Based on cross-sectional tests, the ZCAPM outperforms the CAPM as well as Fama and French (1993) three-factor model and Carhart (1997) four-factor models in terms of both higher goodness-of-fit and statistical significance of factor loadings. Additionally, because endogeneity of test asset portfolios can inflate the performance of multifactor models, it is recommended to include exogenous tests assets such as industry portfolios in cross-sectional tests