The Explanatory Power of Higher Systematic Moment in Conditional Capital Asset Pricing Model

Document Type : Original Article

Authors

1 Asistant prof, Department of Financial and Accounitig, Shahid Beheshti University, Tehran, Iran.

2 MSc of Financial Management, Shahid Beheshti University, Tehran, Iran

Abstract

The capital asset pricing model is based on the assumption of the normal distribution of asset returns. However, many studies have challenged the assumption of the normal distribution of returns and subsequently, by adding higher momentto model development. Also, in examining the effect of higher moments real returns instead of expected returns is used, also because the capital asset pricingmodel assumes investors' preferences and the asset return distribution is stablethe conditional relationship between returns and these moments is examination. Therefore, the purpose of this study is to examine the empirical effects of the third and fourth systematic moments on the minimum rate of expected return on investment in in a conditional way.
 The research sample includes 195 companies accepted in Tehran Stock Exchange from 2004 to 2016. In order to study the effect of the third and fourth systematic moments, the Fama Macbeth method (1973) has been used. Evidence suggests that in the whole study period, the effect of skewness was systematically negative, and systematic kurtosishas not been effective on the expected minimum expected return rate. In the bullish market, the systematic skewness has a direct effect of reversal and systematic elongation, and in the downside, both reversed the effect.

Keywords

References

  1. Akbar, M. & Nguyen, T. (2016). The explanatory power of higher moment capital asset pricing model in the Karachi stock exchange. Research in International Business and Finance, 36(7), 241-253.
  2. Andersen, T., Bollerslev, T., Deibold, F., &Ebens, H (2000). The distribution of realized stock return volatility. Journal of Financial Economics, 61(1), 43–76.
  3. Arditti, F. (1967). Risk and the Required Return on Equity. Journal of Finance, 22 (1), 19-36.
  4. Chiao, C., Hung, H. & Srivastava, S. (2003). Taiwan stock market and four-moment asset pricing model. Int. Fin. Markets, Inst. and Money, 13(3), 255-381.
  5. Chung, Y., Johnson, H. & Michael, J. (2001). Asset Pricing When Returns Are Nonnormal: Fama-French Factors vs. Higher-order Systematic Co-Moments. TheJournalofBusiness, 79(3), 923-940.
  6. Davallou, M., Tirandazi Hosseini, Gh (1395). Common moments: evidence of asset pricing, Quarterly Quantitative Economics, 12 (4), 119-134. (in Persian)
  7. Fama, E. (1968). The behavior of stock market prices. Journal of Business, 38(3), 34-105.
  8. Fama, E. &MacBeth, J. (1973). Risk, return and equilibrium: empirical tests. J Polit. Econ, 81(6), 607–636.
  9. Fang, H. & Lai, T. (1997). Co-kurtosis and capital asset pricing. Financial Review, 32(8), 293-307.
  10. Goetzmann, W., Ingersoll, J., Spiegel, M. & Welch, I. (2004). Sharpening sharpe ratios. Yale ICF Working Paper. 02-08.
  11. Harvey, C.R. & Siddique, A. (1999). Autoregressive conditional skewness. Journal of Financial and Quantitative Analysis, 34(3), 465-487.
  12. Hung, D., Shackleton, M. & Xu, X., (2004). CAPM, Higher Co-moment and Factor Models of UK Stock Returns. Journal of Business Finance & Accounting, 31(1), 87–112.
  13. Kraus, A. &Litzenberger, R. (1976). Skewness Preference and the Valuation of Risk Assets. The Journal of Finance, 31(3), 1085-1100.
  14. Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7(4), 77–91.
  15. Pettengill, G., Sundaram, S. &Mathur, I. (1995). The conditional relation between beta and returns. J. Financ. Quant. Anal. 30 (9), 101–116.
  16. Pratt, J. (1964). Risk Aversion in the Small and in the Large. The Econometric Society, 32(1), 122-136.
  17. Raei, R., Baharwand, S. And Mowafaghi, M. (1389).Asset Pricing with more factors. Quarterly Quantitative Economics, 7 (4), 101-115. (in Persian)
  18. Rubinstein, M. (1973). The Fundamental Theorem of Parameter-Preference Security Valuation. The Journal of Financial and Quantitative Analysis, 8(7), 61-69.
  19. Scott, R. &Horath, P. (1980). On The Direction of Preference for Moments of Higher Order Than The Variance. Journal of Finance, 35(1), 915-919.
  20. Sharpe, W. (1964). Capital asset prices: a theory of market equilibrium under conditions of risk. J. Finance, 19(9), 425–442.
  21. Smith, D. (2007). Conditional coskewness and asset pricing. Journal of Empirical Finance, 17(3), 91-119.
  22. Tehrani, R., Belgorian, M. And Nabizadeh, A. (1387). Investigating the effect of skewness and kurtosis in stock market description using capital pricing model. Quarterly Journal of the Stock Exchange, 1 (4), 35-5(in Persian)2.
  23. Teplova, T. &Shutova, E. (2011). A Higher Moment Downside Framework for Conditional an Unconditional CAPM in the Russian Stock Market. Eurasian Economic Review, 1(2), 157–178.
  24. Wolfle, M. & Fuss, R. (2010). A higher-moment CAPM of Korean stock returns. Int. J. Trade Global Mark, 3(3), 24–51.
  25. Zhang, X. (2013). Book-to-Market Ratio and Skewness of Stock Returns. TheAccounting Review, 88(6), 2213-2240.

Files

Share

How to cite

Statistics