Some extensions of the CAPM for individual assets

Vasco Vendrame, Jon Tucker, Cherif Guermat

Research output: Contribution to journalArticlepeer-review

11 Citations (Scopus)
385 Downloads (Pure)


There is ample evidence that stock returns exhibit non-normal distributions with high skewness and excess kurtosis. Experimental evidence has shown that investors like positive skewness, dislike extreme losses and show high levels of prudence. This has motivated the introduction of the four-moment capital asset pricing model (CAPM). This extension, however, has not been able to successfully explain average returns. Our paper argues that a number of pitfalls may have contributed to the weak and conflicting empirical results found in the literature. We investigate whether conditional models, whether models that use individual stocks rather than portfolios and whether models that extend both the moment and factor dimension can improve on more traditional static, portfolio-based, mean-variance models. More importantly, we find that the use of a scaled coskewness measure in cross-section regression is likely to be spurious because of the possibility for the market skewness to be close to zero, at least for some periods. We provide a simple solution to this problem.

Original languageEnglish
Pages (from-to)78-85
Number of pages8
JournalInternational Review of Financial Analysis
Early online date28 Jan 2016
Publication statusPublished - 1 Mar 2016
Externally publishedYes

Bibliographical note

NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, Vol 44 (2016) DOI: 10.1016/j.irfa.2016.01.010

© 2016, Elsevier. Licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International


  • CAPM
  • Cross-section
  • Higher moments
  • Individual assets
  • Kurtosis
  • Skewness

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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