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

Chung, Y. Peter; Johnson, Herb; Schill, Michael J.

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

27 Pages Posted: 16 Feb 2004

See all articles by Y. Peter Chung

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: 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. Available at SSRN: https://ssrn.com/abstract=503122