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Co‐Skewness and Capital Asset Pricing

Co‐Skewness and Capital Asset Pricing Co-Skewness and Capital Asset Pricing IRWIN FRIEND and RANDOLPH WESTERFIELD* I. Introduction VIRTUALLY OF THE early studies of the Sharpe-Lintner capital asset pricing ALL model (CAPM) found the predicted linear relationship between return and the non-diversifiable risk of risky assets, generally represented by common stocks listed on the New York Stock Exchange (NYSE). However, they also found that this return-risk relationship seemed to imply for most periods a riskless market rate of return substantially above any reasonable measure of the actual risk-free rates of return. Recent papers point to a similar result if the market portfolio of risky assets is represented by an appropriately weighted portfolio of common stocks and bonds instead of common stocks alone.' Thus, it is noteworthy that a study by Kraus and Litzenberger finds that a measure of co-skewness can be used as a supplement to the co-variance measure of risk to explain the returns on individual NYSE stocks, and in the process to explain the otherwise observed discrepancies between these returns and the returns on NYSE stocks as a whole.2 In other words, they extend capital asset pricing theory to incorporate the effect of skewness in return distributions, making the assumption that investors http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Co‐Skewness and Capital Asset Pricing

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References (10)

Publisher
Wiley
Copyright
1980 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1980.tb03508.x
Publisher site
See Article on Publisher Site

Abstract

Co-Skewness and Capital Asset Pricing IRWIN FRIEND and RANDOLPH WESTERFIELD* I. Introduction VIRTUALLY OF THE early studies of the Sharpe-Lintner capital asset pricing ALL model (CAPM) found the predicted linear relationship between return and the non-diversifiable risk of risky assets, generally represented by common stocks listed on the New York Stock Exchange (NYSE). However, they also found that this return-risk relationship seemed to imply for most periods a riskless market rate of return substantially above any reasonable measure of the actual risk-free rates of return. Recent papers point to a similar result if the market portfolio of risky assets is represented by an appropriately weighted portfolio of common stocks and bonds instead of common stocks alone.' Thus, it is noteworthy that a study by Kraus and Litzenberger finds that a measure of co-skewness can be used as a supplement to the co-variance measure of risk to explain the returns on individual NYSE stocks, and in the process to explain the otherwise observed discrepancies between these returns and the returns on NYSE stocks as a whole.2 In other words, they extend capital asset pricing theory to incorporate the effect of skewness in return distributions, making the assumption that investors

Journal

The Journal of Finance – Wiley

Published: Sep 1, 1980

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