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Keywords:

  • Asset pricing;
  • Skewness;
  • Kurtosis;
  • Beta risk;
  • Australian stock returns

Abstract

We examine whether systematic higher moments capture beta asymmetry in an asset pricing model whereby the conditional beta of a risky asset increases (decreases) during a bear (bull) market state. We first provide a simple conceptual outline from the microeconomic literature to show that beta asymmetry is driven by time-varying higher-order risk preferences (prudence and temperance) across different market states. We then empirically relate these higher-order risk preferences to systematic skewness and systematic kurtosis. We find that beta asymmetry in Australian stock returns cannot be explained by Carhart (1997) 4-factor model but is subsumed by systematic higher moments.