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CAPM, Higher Co-moment and Factor Models of UK Stock Returns

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  • Daniel Chi-Hsiou Hung
  • Mark Shackleton
  • Xinzhong Xu

Abstract

In this paper we examine the variables that explain the cross-section of UK stock returns. Previous studies have found that the CAPM beta has moderate or even insignificant explanatory power once the Fama French factors are included. However, we control for different realised risk premia in up and down markets by using the same methodology as Pettengill, Sundaram and Mathur (1995). Unlike previous work, we find that beta is highly significant in explaining the cross-section of UK stock returns and more importantly remains significant even when the Fama French factors are included in the cross-sectional regressions. We also investigate whether higher co-moments (co-skewness and co-kurtosis) have any explanatory power but find that empirical support is weaker. Copyright Blackwell Publishers Ltd, 2004.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 31 (2004-01)
Issue (Month): 1-2 ()
Pages: 87-112

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Handle: RePEc:bla:jbfnac:v:31:y:2004-01:i:1-2:p:87-112

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Cited by:
  1. Kostakis, Alexandros & Muhammad, Kashif & Siganos, Antonios, 2012. "Higher co-moments and asset pricing on London Stock Exchange," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 913-922.
  2. Guermat, Cherif & Freeman, Mark C., 2010. "A net beta test of asset pricing models," International Review of Financial Analysis, Elsevier, vol. 19(1), pages 1-9, January.
  3. Morelli, David, 2011. "Joint conditionality in testing the beta-return relationship: Evidence based on the UK stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(1), pages 1-13, February.
  4. David Morelli, 2012. "Security returns, beta, size, and book-to-market equity: evidence from the Shanghai A-share market," Review of Quantitative Finance and Accounting, Springer, vol. 38(1), pages 47-60, January.
  5. Iqbal, Javed & Brooks, Robert & Galagedera, Don UA, 2007. "Testing Asset Pricing Models in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor Models," MPRA Paper 25020, University Library of Munich, Germany, revised Oct 2007.
  6. Chi-Hsiou Hung, 2007. "Return Explanatory Ability and Predictability of Non-Linear Market Models," Working Papers 2007_05, Durham University Business School.
  7. Nawar, Hashem, 2010. "Industry Concentration and the Cross-section of Stock Returns: Evidence from the UK," MPRA Paper 28440, University Library of Munich, Germany, revised Nov 2010.
  8. Chi-Hsiou Hung, 2007. "Momentum, Size and Value Factors versus Systematic Co-moments in Stock Returns," Working Papers 2007_02, Durham University Business School.
  9. Charlie Cai & Robert Faff & David Hillier & Michael McKenzie, 2006. "Modelling return and conditional volatility exposures in global stock markets," Review of Quantitative Finance and Accounting, Springer, vol. 27(2), pages 125-142, September.
  10. Banerjee, Anurag & Hung, Chi-Hsiou, 2011. "Informed momentum trading versus uninformed "naive" investors strategies," Journal of Banking & Finance, Elsevier, vol. 35(11), pages 3077-3089, November.
  11. Morelli, David, 2007. "Beta, size, book-to-market equity and returns: A study based on UK data," Journal of Multinational Financial Management, Elsevier, vol. 17(3), pages 257-272, July.

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