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

Yifan Chen, Zilin Chen and Huoqing Tang ()

China Finance Review International, 2019, vol. 10, issue 3, 323-346

Abstract: Purpose - 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/approach - The 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. Findings - The 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/value - Overall, this study introduces a new asset pricing model with better measurements to incorporate risk information in the stock market.

Keywords: Asset pricing model; High-order moment; Joint distribution; C14; C50; G11; G32 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:cfripp:cfri-06-2019-0070

DOI: 10.1108/CFRI-06-2019-0070

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