Are co-skewness and co-kurtosis factors priced? Evidence from the UK and Greek stock markets

Abstract

This study explores the role of higher moments on the UK and Greek stock market using the asset pricing framework developed in Fang and Lai (1997). Estimations have been made for the whole period and two sub-periods for both markets. The models estimated are: 1) Four-Moment CAPM: 𝑅𝑖=𝑏0+𝑏1𝛽𝑖+𝑏2𝛾𝑖+𝑏3𝛿𝑖 2) Three-Moment CAPM: 𝑅𝑖=𝑏0+𝑏1𝛽𝑖+𝑏2𝛾𝑖 , 3) Two-Moment CAPM: 𝑅𝑖=𝑏0+𝑏1𝛽𝑖 and 4) CAPM with beta and kurtosis: 𝑅𝑖=𝑏0+𝑏1𝛽𝑖+𝑏3𝛿𝑖. We present the estimated premiums and their t-statistics. The results show that for most portfolios the asset pricing performance improves when we add skewness and/or kurtosis to the CAPM. In addition to the grouping procedure suggested by Fang and Lai (1997) , three different grouping procedures ate tested on the UK market. In these cases while the models provide significant estimates the explanatory power of the models remains low.