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Conditional coskewness and asset pricing

Smith, Daniel R. (2007) Conditional coskewness and asset pricing. Journal of Empirical Finance, 14(1), p. 91.

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Abstract

We explore the empirical usefulness of conditional coskewness to explain the cross-section of equity returns. We find that coskewness is an important determinant of the returns to equity, and that the pricing relationship varies through time. In particular we find that when the conditional market skewness is positive investors are willing to sacrifice 7.87% annually per unit of gamma (a standardized measure of coskewness risk) while they only demand a premium of 1.80% when the market is negatively skewed. A similar picture emerges from the coskewness factor of Harvey and Siddique (Harvey, C., Siddique, A., 2000a. Conditional skewness in asset pricing models tests. Journal of Finance 65, 1263–1295.) (a portfolio that is long stocks with small coskewness with the market and short high coskewness stocks) which earns 5.00% annually when the market is positively skewed but only 2.81% when the market is negatively skewed. The conditional two-moment CAPM and a conditional Fama and French (Fama, E., French, K., 1992. The cross-section of expected returns. Journal of Finance 47,427465.) three-factor model are rejected, but a model which includes coskewness is not rejected by the data. The model also passes a structural break test which many existing asset pricing models fail.

Impact and interest:

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ID Code: 32936
Item Type: Journal Article
Keywords: GMM; Asset pricing; , Conditional; , Coskewness; , Pricing kernel, Nonlinear;
DOI: 10.1016/j.jempfin.2006.04.004
ISSN: 09275398
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > ECONOMETRICS (140300)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Current > Schools > School of Economics & Finance
Deposited On: 24 Jun 2010 15:56
Last Modified: 29 Feb 2012 23:56

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