Monotonicity in asset returns: New tests with applications to the term structure, the CAPM, and portfolio sorts


Journal Article

Many theories in finance imply monotonic patterns in expected returns and other financial variables. The liquidity preference hypothesis predicts higher expected returns for bonds with longer times to maturity; the Capital Asset Pricing Model (CAPM) implies higher expected returns for stocks with higher betas; and standard asset pricing models imply that the pricing kernel is declining in market returns. The full set of implications of monotonicity is generally not exploited in empirical work, however. This paper proposes new and simple ways to test for monotonicity in financial variables and compares the proposed tests with extant alternatives such as t-tests, Bonferroni bounds, and multivariate inequality tests through empirical applications and simulations. © 2010 Elsevier B.V.

Full Text

Duke Authors

Cited Authors

  • Patton, AJ; Timmermann, A

Published Date

  • December 1, 2010

Published In

Volume / Issue

  • 98 / 3

Start / End Page

  • 605 - 625

International Standard Serial Number (ISSN)

  • 0304-405X

Digital Object Identifier (DOI)

  • 10.1016/j.jfineco.2010.06.006

Citation Source

  • Scopus