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Pricing assets with higher moments: Evidence from the Australian and us stock markets

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  • Doan, Phuong
  • Lin, Chien-Ting
  • Zurbruegg, Ralf
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    Abstract

    This paper investigates the importance of higher moments of return distributions in capturing the variation of average stock returns for companies listed in the leading S&P US and Australian indices. We find that Australian stocks are more negatively skewed but less leptokurtic than US stocks. As a result, we find that co-skewness plays a more important role in explaining Australian returns while co-kurtosis is consistently influential for US stock returns. We postulate that the differences in results are related to the underlying firm characteristics of the companies in the two indices, where principally the Australian firms are noticeably smaller than their US counterparts and concentrated in a smaller number industry sectors. This implies that for many smaller exchanges around the world higher moment characteristics displayed by the US market may not be applicable. We also show our results are robust to partly explaining average stock returns in the presence of size, value, and momentum effects.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Financial Markets, Institutions and Money.

    Volume (Year): 20 (2010)
    Issue (Month): 1 (February)
    Pages: 51-67

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    Handle: RePEc:eee:intfin:v:20:y:2010:i:1:p:51-67

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    Web page: http://www.elsevier.com/locate/intfin

    Related research

    Keywords: Asset pricing Co-skewness Co-kurtosis Fama and French 3 factors Australian stock market;

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    Cited by:
    1. Tamara Teplova & Evgeniya Shutova, 2011. "A Higher Moment Downside Framework for Conditional and Unconditional CAPM in the Russian Stock Market," Eurasian Economic Review, Eurasia Business and Economics Society, vol. 1(2), pages 157-178, Fall.

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