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Asset Pricing When Returns Are Nonnormal: Fama-French Factors versus Higher-Order Systematic Comoments

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  • Y. Peter Chung

    (University of California, Riverside)

  • Michael J. Schill

    (University of Virginia)

Abstract

A growing literature contends that, since returns are not normal, higher-order comoments matter to risk-averse investors. Fama and French (1993, 1995) find that nonmarket risk factors based on size and book-to-market ratio are priced by investors. We test the hypothesis that the Fama-French factors simply proxy for the pricing of higher-order comoments. Using portfolio returns over various time horizons, we show that adding a set of systematic comoments (but not standard moments) of order 3–10 reduces the explanatory power of the Fama-French factors to insignificance in almost every case.

Suggested Citation

  • Y. Peter Chung & Michael J. Schill, 2006. "Asset Pricing When Returns Are Nonnormal: Fama-French Factors versus Higher-Order Systematic Comoments," The Journal of Business, University of Chicago Press, vol. 79(2), pages 923-940, March.
  • Handle: RePEc:ucp:jnlbus:v:79:y:2006:i:2:p:923-940
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