Higher moments and beta asymmetry: evidence from Australia

Minh Phuong Doan, Chien-Ting Lin, Michael Chng and David Gallagher

Accounting and Finance, 2014, vol. 54, issue 3, 779-807

Abstract: type="main" xml:id="acfi12022-abs-0001" xml:lang="en">

We examine whether systematic higher moments capture beta asymmetry in an asset pricing model whereby the conditional beta of a risky asset increases (decreases) during a bear (bull) market state. We first provide a simple conceptual outline from the microeconomic literature to show that beta asymmetry is driven by time-varying higher-order risk preferences (prudence and temperance) across different market states. We then empirically relate these higher-order risk preferences to systematic skewness and systematic kurtosis. We find that beta asymmetry in Australian stock returns cannot be explained by Carhart (1997) 4-factor model but is subsumed by systematic higher moments.

Date: 2014
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