Asset Pricing When Returns Are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments
Y. Peter Chung
University of California at Riverside
University of California, Riverside - Department of Finance and Management Science
Michael J. Schill
University of Virginia – Darden Graduate School of Business Administration
Journal of Business, Forthcoming
A growing literature contends that, because returns are not normal, higher-order co-moments matter to risk-averse investors. Fama and French (1993, 1995) find that nonmarket risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order co-moments. Using portfolio returns over various time horizons, we show that adding a set of systematic co-moments (but not standard moments) of order 3 through 10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.
Number of Pages in PDF File: 27Accepted Paper Series
Date posted: February 16, 2004
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