The Four-Moment CAPM and Non-Linear Market Models in Momentum and Size Strategies
42 Pages Posted: 9 May 2004
Date Written: January 2007
A growing literature shows evidence that supports higher-moment CAPM. We conduct cross-sectional tests of the four-moment CAPM on returns of portfolios formed from combining stocks in international markets and portfolios invested locally in the U.K. and the U.S. We find that coskewness and cokurtosis are significant in explaining the cross-section of returns of beta-gamma-delta sequential sorts, one-way and two-way momentum and size portfolios. Secondly, we investigate whether higher-moment-CAPM nonlinear market models can explain and predict time-series of portfolio returns. We find that non-linear market terms are significant in explaining time-series returns of the winner and smallest size deciles and that the quadratic market model has the smallest prediction error among models.
Keywords: Asset pricing, Coskewness, Cokurtosis, Momentum, Size
JEL Classification: G11, G12, G15
Suggested Citation: Suggested Citation