Asset Pricing with Higher Moments: Empirical Evidence from the Taiwan Stock Market

Bing-Huei Lin and Jerry M. C. Wang
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Bing-Huei Lin: Department of Business Administration, National Taiwan University of Science and Technology, No. 43, Section 4, Keelung Road, Taipei 104, Taiwan, ROC
Jerry M. C. Wang: Department of Business Administration, National Taiwan University of Science and Technology, Taiwan, ROC

Chapter 9 in Advances in Quantitative Analysis of Finance and Accounting:New Series, 2004, pp 153-170 from World Scientific Publishing Co. Pte. Ltd.

Abstract: AbstractThis study examines the effects of higher moments, skewness and kurtosis of stock returns on asset pricing for the Taiwan stock market. The traditional two-moment CAPM and Fama-French model with size and book-to-market factors included were used as base cases. Then the three-moment and four-moment CAPMs and Fama-French models with systematic skewness and kurtosis included were tested. In addition to the market models used to estimate the parameters of systematic skewness and kurtosis, some proxy measures obtained from a procedure similar to Harvey and Sidique (2000b) were also adopted. Following the Fama-Macbath procedure, the two-step cross-sectional regressions were adopted to test the pricing models. Weekly returns for 132 stocks on the Taiwan stock market over the period from January 1991 to August 2002 were used for empirical testing. The results show that the three-moment CAPM is significant, whereas the fourth moment is not consistent with the empirical data. In the case of the Fama-French model, the size and book-to-market effects seem to dominate the moment effects. Although the parameters are insignificant, their consistent signs confirm the existence of the third moment effect on asset pricing.

Keywords: Discretionary Accruals; Futures Price Volatility; Bid-Ask Spread Components; CEO Compensation; Executive Cash Compensation; Convertible Debts; Environmental Liabilities (search for similar items in EconPapers)
Date: 2004
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