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High-order moments in stock pricing: evidence from the Chinese and US markets

High-order moments in stock pricing: evidence from the Chinese and US markets The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks.Design/methodology/approachThe AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return.FindingsThe performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama–French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama–French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets.Originality/valueOverall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png China Finance Review International Emerald Publishing

High-order moments in stock pricing: evidence from the Chinese and US markets

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
2044-1398
DOI
10.1108/cfri-06-2019-0070
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to introduce an augmented high-order capital asset pricing model (AH-CAPM) as a new risk-based model to price stocks.Design/methodology/approachThe AH-CAPM is defined as a linear model with high-order marginal moments and co-moments from the joint distributions of the sorted stock portfolio returns and the market return.FindingsThe performance of the AH-CAPM is tested in the Chinese and US stock markets. Empirical results show that the high-order marginal moments and co-moments from the joint distributions in AH-CAPM contain the risk and return information implied by the Fama–French factors, indicating it as a better risk measurement. Moreover, the AH-CAPM performs better than the Fama–French three-factor model and the Carhart four-factor model in both the Chinese and US stock markets.Originality/valueOverall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.

Journal

China Finance Review InternationalEmerald Publishing

Published: Jun 18, 2020

Keywords: Asset pricing model; High-order moment; Joint distribution; C14; C50; G11; G32

References