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Testing Asset Pricing Models in Emerging Markets: An Examination of Higher Order Co-Moments and Alternative Factor Models

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  • Iqbal, Javed
  • Brooks, Robert
  • Galagedera, Don UA

Abstract

For emerging market returns there is strong evidence that the departure from normality is primarily driven by kurtosis and not skewness. This paper investigates the empirical validity of a return generating process that includes quadratic and cubic market returns as factors of pricing for an emerging market. Following Barone-Adesi et al. (2004) a multivariate test of a three-moment pricing model is developed. The empirical evidence in the market returns support the stylized facts typical for an emerging market and reveal that any return generating process that includes only a quadratic term (coskewness) may be misspecified. However comparison of higher order market return factors with Fama French factors indicates that while risk exposure to these higher order co-moments factors especially cokurtosis is important the co-moments do not possess sufficient explanatory power to render Fama French factor redundant.

Suggested Citation

  • 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.
    • Handle: RePEc:pra:mprapa:25020
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    References listed on IDEAS

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    Cited by:

    1. Akbar, Muhammad & Nguyen, Thuy Thu, 2016. "The explanatory power of higher moment capital asset pricing model in the Karachi stock exchange," Research in International Business and Finance, Elsevier, vol. 36(C), pages 241-253.

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    More about this item

    Keywords

    Higher Order Co-Moments; Asset Pricing; Emerging Markets;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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