Test of Higher Moment Capital Asset Pricing Model in Case of Pakistani Equity Market

Attiya Javid

MPRA Paper from University Library of Munich, Germany

Abstract: In this study we test the mean-variance capital asset pricing model (CAPM) developed by Sharpe (1965) Lintner (1966) on individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan for the period 1993-2004 using daily and monthly data. The empirical findings do not support standard CAPM as a model to explain assets pricing in Pakistani equity market. In response to this finding first, we have extended the model to mean-variance-skewness and mean-variance-skewness-kurtosis model following Kraus and Litzenberger (1976). In the second step we allow the covariance, coskewness and cokurtosis to vary over time in autoregressive context leading to conditional three-moment CAPM and conditional four-moment CAPM. The results of unconditional and conditional higher-moments CAPM reveal that three-moment CAPM performed relatively well in explaining risk-return relationship in Pakistan during the sample period However, the results of higher-moment model indicate that systematic covariance and systematic cokurtosis have marginal role in explaining the asset price behavior in Pakistan.

Keywords: Covariance; coskewness; cokurtosis; non-normal return distribution; capital asset pricing model; time-varying moments (search for similar items in EconPapers)
JEL-codes: C29 G12 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (7)

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