Abstract
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 language | English |
|---|---|
| Pages (from-to) | 78-85 |
| Number of pages | 8 |
| Journal | International Review of Financial Analysis |
| Volume | 44 |
| Early online date | 28 Jan 2016 |
| DOIs | |
| Publication status | Published - 1 Mar 2016 |
| Externally published | Yes |
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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 http://creativecommons.org/licenses/by-nc-nd/4.0/
Keywords
- CAPM
- Cross-section
- Higher moments
- Individual assets
- Kurtosis
- Skewness
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
Cite this
Some extensions of the CAPM for individual assets. / Vendrame, Vasco; Tucker, Jon; Guermat, Cherif.
In: International Review of Financial Analysis, Vol. 44, 01.03.2016, p. 78-85.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Some extensions of the CAPM for individual assets
AU - Vendrame, Vasco
AU - Tucker, Jon
AU - Guermat, Cherif
N1 - 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 http://creativecommons.org/licenses/by-nc-nd/4.0/
PY - 2016/3/1
Y1 - 2016/3/1
N2 - 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.
AB - 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.
KW - CAPM
KW - Cross-section
KW - Higher moments
KW - Individual assets
KW - Kurtosis
KW - Skewness
UR - http://www.scopus.com/inward/record.url?scp=84957657704&partnerID=8YFLogxK
U2 - 10.1016/j.irfa.2016.01.010
DO - 10.1016/j.irfa.2016.01.010
M3 - Article
VL - 44
SP - 78
EP - 85
JO - International Review of Financial Analysis
JF - International Review of Financial Analysis
SN - 1057-5219
ER -