Higher-Order Systematic Comoments and Asset Pricing: New Evidence

Authors


  • We thank Arnold Cowan (the editor) and the two anonymous referees for their many helpful suggestions and comments while the paper was in preparation. All the remaining errors and omissions, however, are ours. D. Nguyen acknowledges the financial support of a summer research grant from the Charlton College of Business.

* Corresponding author: Department of Accounting and Finance, Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road, North Dartmouth, MA 02747; Phone: 508-999-8759; Fax: 1-508-999-8646; E-mail: tpuri@umassd.edu.

Abstract

We provide evidence supporting Rubinstein's (1973) model that if returns are not normal, measuring risk requires more than just measuring covariance. Higher-order systematic comoments should be important to risk-averse investors who are concerned about the extreme outcomes of their investments. Our paper shows that the Fama-French factors [SMB (return on small stocks less the return on big stocks), HML (return on high book-to-market stocks less the return on low book-to-market stocks)] as well as the momentum and market liquidity factors can be explained by the higher-order systematic comoments, and it lends support to the traditional covariance risk-based theory without having to resort to behavior assumptions.

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