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

27 Pages Posted: 16 Feb 2004  

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

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Abstract

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.

Suggested Citation

Chung, Y. Peter and Johnson, Herb and Schill, Michael J., Asset Pricing When Returns Are Nonnormal: Fama-French Factors vs. Higher-Order Systematic Co-Moments. Journal of Business, Forthcoming. Available at SSRN: https://ssrn.com/abstract=503122

Y. Peter Chung

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 (Contact Author)

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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