 A conditional higher-moment CAPMVasco Vendrame, Cherif Guermat and Jon Tucker International Review of Financial Analysis, 2023, vol. 86, issue C Abstract: This paper investigates whether dynamic and moment extensions to the traditional CAPM can improve its empirical performance and offer some alternative explanation to the cross-section of average returns on portfolios of stocks double sorted on book-to-market ratios and size. We consider three extensions. First, we introduce time-varying factor loadings obtained from a multivariate GARCH and dynamic conditional correlations. Second, we extend the model to a four-moment CAPM, which incorporates coskewness and cokurtosis. Finally, we allow for time-varying risk premia, based on a Markov-switching process. Our results confirm that the higher-moment CAPM does not perform well in its unconditional version, but its performance is significantly improved when we introduce a conditional version that accounts for both time-varying factor loadings and time-varying risk premia. The four-moment CAPM tests lead to a positive total risk premium estimate of 0.67% per month over the period 1926–2021, with all risk premia (beta, coskewness, and cokurtosis) exhibiting the expected theoretical signs. Keywords: CAPM; Higher-moments; Conditional models; Regime switching (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:86:y:2023:i:c:s1057521923000406 DOI: 10.1016/j.irfa.2023.102524 Access Statistics for this article International Review of Financial Analysis is currently edited by B.M. Lucey More articles in International Review of Financial Analysis from Elsevier |
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