Asset Pricing When Returns are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments

23 Pages Posted: 17 May 2001

See all articles by Y. Peter Chung

Y. Peter Chung

University of California at Riverside

Herb Johnson

University of California, Riverside (UCR) - Department of Finance and Management Science

Michael J. Schill

University of Virginia - Darden School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: May 9, 2001

Abstract

A number of papers (notably Fama and French (1993, 1995)) find that non-market risk factors, such as size and the book-to-market ratio, are priced by investors. We test whether these other risk factors are merely proxies for omitted higher-order market-risk factors. Using size-sorted portfolio returns at daily, weekly, monthly, quarterly, and semi-annual intervals, we find in every case that the distribution of returns differs significantly from normality. Since returns are not normal, we expect higher-order co-moments to matter to investors. We show that adding 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.

JEL Classification: G12

Suggested Citation

Chung, Y. Peter and Johnson, Herbert E. and Schill, Michael J., Asset Pricing When Returns are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments (May 9, 2001). Available at SSRN: https://ssrn.com/abstract=270233 or http://dx.doi.org/10.2139/ssrn.270233

Y. Peter Chung (Contact Author)

University of California at Riverside ( email )

900 University Avenue
Riverside, CA 92521
United States
909-787-3906 (Phone)
909-787-2933 (Fax)

Herbert E. Johnson

University of California, Riverside (UCR) - Department of Finance and Management Science ( email )

900 University Avenue
Riverside, CA 92521
United States
909-787-2932 (Phone)
909-787-2933 (Fax)

Michael J. Schill

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4071 (Phone)
434-243-7676 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/schill.htm

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