Modelling Emerging Market Risk Premia using Higher Moments
AbstractThe purpose of this paper is to build an asset pricing model for emerging markets using higher moments. It is well-known that conventional CAPM models fail to explain the risk present in the data. The contribution of this paper is to use an extended CAPM that explicitly involves measures of skewness and kurtosis to capture the risk premium. The four- moment CAPM may be appropriate when the third and fourth moments are substantial. For estimating and testing the higher-moment CAPMs in emerging markets, the authors us a generalised method of moments which is distribution free and thus the preferred method to use because of the difficulty of accurately modelling return distribution in emerging markets. However, the paper also presents higher-moment models as the data generating process of the individual emerging markets. They are considered with higher-moment CAPMs, while reducing the multi-collinearity in the risk measures.
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Bibliographic InfoPaper provided by Faculty of Economics, University of Cambridge in its series Cambridge Working Papers in Economics with number 9806.
Date of creation: 1998
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Web page: http://www.econ.cam.ac.uk/index.htm
Other versions of this item:
- Hwang, Soosung & Satchell, Stephen E, 1999. "Modelling Emerging Market Risk Premia Using Higher Moments," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(4), pages 271-96, October.
- Stephen Satchell & Soosung Hwang, 1999. "Modelling Emerging Market Risk Premia Using Higher Moments," Working Papers wp99-17, Warwick Business School, Finance Group.
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