Comoment Risk and Stock Returns
Posted: 22 Oct 2010
Date Written: October 21, 2010
This paper estimates higher-order comoment equity risk premiums for the US stock markets. We use an extension of the Fama and French (1993) method to infer the returns attached to a unit exposure to coskewness and cokurtosis risks in the US equity markets. The coskewness and cokurtosis premiums present significant monthly average returns of respectively 0.2% and 0.4% from March 1989 to June 2008. We test the ability of the moment-related premiums to explain the size and book-to-market (BTM) effects in stock returns. Coskewness and cokurtosis risks seem to be significant in explaining the stock returns of small caps and value stocks. The Four-Moment Asset Pricing Model even captures a higher proportion of the return variability of the portfolios sorted on size and book-to-market than an empirical Capital Asset Pricing Model. The higher-order comoment premiums do not subsume the empirical risk factors of Fama and French (1993) and Carhart (1997).
Keywords: Comoment, Hedge Portfolios, Fama and French Method, Fama-MacBeth Test
JEL Classification: G11, G12
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