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Test of Higher Moment Capital Asset Pricing Model in Case of Pakistani Equity Market

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  • Javid, Attiya Yasmin

Abstract

In this study we test the mean-variance capital asset pricing model (CAPM) developed by Sharpe (1965) Lintner (1966) on individual stocks traded at Karachi Stock Exchange (KSE), the main equity market in Pakistan for the period 1993-2004 using daily and monthly data. The empirical findings do not support standard CAPM as a model to explain assets pricing in Pakistani equity market. In response to this finding first, we have extended the model to mean-variance-skewness and mean-variance-skewness-kurtosis model following Kraus and Litzenberger (1976). In the second step we allow the covariance, coskewness and cokurtosis to vary over time in autoregressive context leading to conditional three-moment CAPM and conditional four-moment CAPM. The results of unconditional and conditional higher-moments CAPM reveal that three-moment CAPM performed relatively well in explaining risk-return relationship in Pakistan during the sample period However, the results of higher-moment model indicate that systematic covariance and systematic cokurtosis have marginal role in explaining the asset price behavior in Pakistan.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 38059.

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Date of creation: 2009
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Handle: RePEc:pra:mprapa:38059

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Related research

Keywords: Covariance; coskewness; cokurtosis; non-normal return distribution; capital asset pricing model; time-varying moments;

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  1. Robert F. Dittmar, 2002. "Nonlinear Pricing Kernels, Kurtosis Preference, and Evidence from the Cross Section of Equity Returns," Journal of Finance, American Finance Association, vol. 57(1), pages 369-403, 02.
  2. Gabriel Hawawini, . "Market Efficiency and Equity Pricing: International Evidence and Implications for Global Investing," Rodney L. White Center for Financial Research Working Papers 08-88, Wharton School Rodney L. White Center for Financial Research.
  3. Dennis Jansen & Casper de Vries, 1988. "On the frequency of large stock returns: putting booms and busts into perspective," Working Papers 1989-006, Federal Reserve Bank of St. Louis.
  4. Ang, Andrew & Chen, Joseph, 2002. "Asymmetric correlations of equity portfolios," Journal of Financial Economics, Elsevier, vol. 63(3), pages 443-494, March.
  5. Lee, Cheng F., 1977. "Functional Form, Skewness Effect, and the Risk-Return Relationship," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 12(01), pages 55-72, March.
  6. Iqbal, Javed & Brooks, Robert & Galagedera, Don U.A., 2010. "Testing conditional asset pricing models: An emerging market perspective," Journal of International Money and Finance, Elsevier, vol. 29(5), pages 897-918, September.
  7. Post, Thierry & van Vliet, Pim & Levy, Haim, 2008. "Risk aversion and skewness preference," Journal of Banking & Finance, Elsevier, vol. 32(7), pages 1178-1187, July.
  8. Kane, Alex, 1982. "Skewness Preference and Portfolio Choice," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 17(01), pages 15-25, March.
  9. Green, Christopher J, 1990. "Asset Demands and Asset Prices in the U.K.: Is There a Risk Premium," The Manchester School of Economic & Social Studies, University of Manchester, vol. 58(3), pages 211-28, September.
  10. Hawawini, Gabriel A., 1980. "An Analytical Examination of the Intervaling Effect on Skewness and Other Moments," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 15(05), pages 1121-1127, December.
  11. Cook, Thomas J. & Rozeff, Michael S., 1984. "Size and Earnings/Price Ratio Anomalies: One Effect or Two?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(04), pages 449-466, December.
  12. Smith, Daniel R., 2007. "Conditional coskewness and asset pricing," Journal of Empirical Finance, Elsevier, vol. 14(1), pages 91-119, January.
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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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